Tax Reforms in Sri Lanka – Will a Tax on Public Servants Improve Progressivity?

34 Pages Posted: 2 Nov 2013 Last revised: 12 Jul 2018

See all articles by Nisha K. Arunatilake

Nisha K. Arunatilake

Institute of Policy Studies of Sri Lanka

Priyanka Jayawardena

Institute of Policy Studies of Sri Lanka (IPS)

Anushka Wijesinha

Institute of Policy Studies of Sri Lanka (IPS)

Date Written: December 1, 2012

Abstract

The Sri Lankan government implemented tax reforms in 2011, including removal of the tax exemption given to public servants and reduction of personal income tax rates in order to improve tax compliance from pay-as-you-earn (PAYE) tax payers. This study evaluates the 2007 and 2011 tax systems in order to examine the effects that taxing the income of public sector employees has on total tax revenues and the tax base. The study also compares the distributional effects of the different tax systems. Study further conducts simulation analyses to assess the most progressive means of achieving the 2007 tax revenue levels. Implications for tax evasion are also examined under different tax systems. The study finds that the 2011 tax reforms reduce tax revenue by 48 percent relative to the structure of income taxation in 2007. This decline in tax revenues occurs even though income taxes are extended to public sector workers because the 2011 tax reforms reduced the rate of income taxes across the board and increased the tax-free threshold. Our simulations show that tax revenues would have risen if the reforms were limited to introducing income taxes to public servants. The resulting (hypothetical) tax system would also have been more progressive than the tax structure resulting from the 2011 reforms. The study evaluated the distributional impacts of modifications to the 2011 tax system which would increase tax revenue to their level in 2007. More specifically, the present study finds that the most progressive way to attain this tax revenue target would be to increase tax rates on taxable income by 6 percentage points and to lower the tax-free threshold from LKR 600,000 to LKR 400,000.

Keywords: comparing tax systems, distributional effects of taxes, income redistribution, tax redistribution, tax progressivity approach, income progressivity approach, tax revenue, progressivity indices, inequality effects of taxes

JEL Classification: H20, H21, H23, H24, H30

Suggested Citation

Arunatilake, Nisha K. and Jayawardena, Priyanka and Wijesinha, Anushka, Tax Reforms in Sri Lanka – Will a Tax on Public Servants Improve Progressivity? (December 1, 2012). Partnership for Economic Policy Working Paper No. 2012-13, Available at SSRN: https://ssrn.com/abstract=2344165 or http://dx.doi.org/10.2139/ssrn.2344165

Nisha K. Arunatilake (Contact Author)

Institute of Policy Studies of Sri Lanka ( email )

100/20 Independence Avenue
Colombo 7
Sri Lanka

HOME PAGE: http://www.ips.lk

Priyanka Jayawardena

Institute of Policy Studies of Sri Lanka (IPS) ( email )

99 St. Michael's Road
Colombo
Sri Lanka

Anushka Wijesinha

Institute of Policy Studies of Sri Lanka (IPS) ( email )

99 St. Michael's Road
Colombo
Sri Lanka

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
146
Abstract Views
753
Rank
360,858
PlumX Metrics