You can undo mobile taxes, but not trade mobility

The budget has been delivered, and it hasn't disappointed. At least not in terms of the controversy it has generated.

When the finance minister announces a review of a budget proposal just a day or two after unveiling the budget, you know you are in for an exciting rollercoaster ride. I am of course talking about the Government's proposal to impose a levy on mobile usage.

This particular proposal has easily been the most criticised of all the new provisions in the budget. So much so that Minister Muhith even came out with a mea culpa of sorts. He said (according to a local English daily, 14 June), 'I didn't expect so much reaction … We are considering a threshold, crossing which a user will have to pay tax. It is now under processing.'

To be honest with you, I too didn't expect this mobile tax proposal to elicit such fierce criticism from economists and other experts. Two such critiques have really stuck to my mind, and frankly, are the reasons why I am writing this opinion piece.

One critique is premised on the argument that a tax on mobile usage is counterproductive because mobile usage is a good thing which we should encourage, not discourage by imposing a tax on it.

I agree with that argument, it's a very valid point of view, and one that can't be easily disputed.

However, it begs the question – why do we have income taxes then? Surely, income isn't a bad thing that we should discourage?

The second critique is that both rich and poor people use mobile phones, and a tax on both income groups in equal proportion is unfair and regressive.

That is indeed true. This tax is regressive!

But then again, so is every value-added tax (VAT). For example, we have VAT on refined soybean oil. Why? Cooking oil is used by everybody and is an even more essential commodity than mobiles.

Well, the answer is – there is actually more to taxation than discouraging bad things, or making sure rich people pay more than poor people. Taxation is also about efficiency. It is very important to design efficient taxes.

Oddly enough, the need for efficient taxes is premised on a rather convoluted argument. That is, all taxes have negative impacts, they discourage economic activity. In an ideal world, you wouldn't want to tax any activity other than bad things such as drug use for example.

But we don't live in an ideal world, and we need taxes to raise revenue to pay for things like national defence or maintaining law and order. Given that the taxation needed to raise revenue will hurt someone or another, it is important to ensure that we raise taxes in the most efficient way possible.

That is the conceptual basis for justifying efficient taxes. So when thinking about which taxes are efficient and which are not, two basic principles come into play.

Firstly, you want to tax fixed or permanent things, things that don't change a lot over time. For example, the worst tax proposal in this budget is the proposal to raise taxes on exports.

Taxes on international trade, be it exports or imports, are the worst kind of taxes out there. The reason is because international trade is very competitive and volatile, where nothing stays constant and things change all the time, and quickly.

Let's say that we are fiercely competing with Vietnam in the international market for footwear. A pair of shoes made in Bangladesh costs $10 a pair in the US, whereas Vietnamese shoes cost $10.20 a pair. Our increase in export taxes may push up the cost of Bangladeshi shoes to $10.50 a pair. That little 50 cent-increase in price, pushing our prices higher than Vietnam's, maybe enough to send $50 million worth of export orders to Vietnam instead of us.

In that sense, a tax on mobile usage, despite being regressive, is much better than an export tax because the mobile market is fixed, it's here to stay. A tax on mobile usage might hurt growth in the telecommunications industry, but that trend that can possibly be reversed by removing the tax. Whereas with the export tax, once we've lost business to Vietnam, we might never get it back, even if we remove the export tax at a future point in time. Hence the title!

The second important aspect of efficient taxation relates to the complexity of administering and collecting taxes.

Let's be pragmatic here for a second. Lots and lots of people in Bangladesh dodge income taxes. Less than one-third of those who have tax identification numbers actually file tax returns. In our case, collecting income tax is clearly a compliance issue.

But more generally, the international experience has been that direct taxes, such as on income, while they can be calibrated to be more progressive, are much harder to administer.

On the other hand, indirect taxes, such as VAT, are much more efficient because they are easier and less expensive to administer. Yes they are regressive, but they also save you money and time in the long-run.

All in all, to the extent that some taxation is necessary, indirect taxes on non-trade exposed economic activity are the best way to go. But then the most obvious question that arises is – how much taxation is actually necessary and justified?

That may seem like a question only economists can answer, but politicians have an important role to play here too. Economists can tell you what the optimal level of taxation should be, beyond which, more taxation will do more harm than good. Politicians have the unenviable task of explaining that technical argument in simple language to the wider public.

On that account, the Government has failed. It should come as no surprise that the Government has been attracting so much criticism on tax increases. A lot of this criticism can be attributed to a failure on the part of the Government to engage in a public discourse on taxation policy.

In fact, the Government appears to be doing the exact opposite of what it ought to be doing. One gets the impression that the Government is trying to raise as much tax as possible to meet its spending targets. That's the wrong approach; it should be the other way around.

I am sure the Centre for Policy Dialogue (CPD) or the Policy Research Institute (PRI), two of our leading economic think‑tanks, can tell us what the right amount of taxation ought to be and how to design those tax policies. The Government should then match its spending priorities according to that optimal level of taxation.

The Government then needs to sell a political narrative on which taxes it wants to use and why, how much importance it places on efficiency over progressivity. And perhaps most importantly, who it wants to tax and what it wants to do with the tax money.

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Nofel Wahid is an applied economist.