ECONOMYNEXT – The new United National Party led administration got off to a bad start in January in public finance, violating old and new principles of governance hurting economic freedoms and justice sending danger signals on arbitrary and unjust taxation.
The new administration now has considerable economic challenges to sort out, with macro-economic problems self-generated by its own deficit spending and money printing.
The budget was probably the worst since the 2004 Rata Perata subsidies, which is driving the country in to currency depreciation and inflation.
Large volumes of money was given to state workers, which will have to be taken from the rest of the society trough future taxes. Some commentators have explained this as a price the private society had to pay to get better governance and freedom, while others say it is the price paid for the incompetence of the then opposition.
Quite apart from triggering balance of payments pressure and currency depreciation by high spending and money printing the budget also undermined people’s freedoms through retrospective and targeted large taxes.
The retrospective and targeted taxes on selected companies undermined rule of law and justice and if any new administration wants to create better conditions for investment and property rights, these taxes on unarmed citizens should be taken off the table forthwith.
Taxation without Consent
The new ‘revenge’ levies come on top of an entirely arbitrary and unparliamentarily system of taxation that already exists, which is completely against the basic principles of democracy and justice.
In Sri Lanka many taxes are hatched in secret and slammed on an unsuspecting public by mid night gazette while they are sleeping, which goes completely against the principle of taxation by consent which was the reason for setting up parliaments in the first place.
It is sad that Sri Lankan citizens are so badly off decades after independence from British rule and subject to the tyrannies of the mid night gazette and taxation without consent.
The origin of the modern nation-state backed by police, a standing army and a legislating parliament are in Europe.
The Magna Carta, or the Great Charter of Liberties of England is considered to be the first constitution-style document to limit the arbitrary rule of a King or sovereign. The feudal barons of England forced King John to sing a document limiting his powers in 1215 mostly because a series of taxes were imposed on them without consent. It was later re-issued by several kings and a key subsequent confirmation in 1297 following a controversial tax on wool under Edward I strengthened the principle.
Through the Confirmation of Charters the King agreed that that….for no need will we take such manner of aid, mises (taxes) or prises (assessments) from our realm henceforth except with the common assent of all the realm and the common profit of the same realm, saving the ancient aids and prises due and accustomed."
In 1689 the principle was strengthened by the English Bill of Rights, under William and Mary which further promised that there will be no taxation by Royal Prerogative and that the agreement of the parliament was necessary for new taxes.
In the US, a key plank of its independence struggle from Britain – taxation without representation – was related to consent.
Taxation by gazette on a Minister’s Prerogative through midnight gazette is continuing in the 21st century while the citizenry is asleep. The hue and cry by those who were victimized by the sudden tax on hybrid cars in January 2015 was a result of the midnight gazette and taxation without consent.
Taxation by midnight gazette has to be abolished as soon as possible, if we are to become a free people. Sri Lanka did not gain freedom in 1948, we got self-determination. After gaining self-determination, we have ‘self-determined’ our way to lose many freedoms including on taxation.
Unfortunately Sri Lanka people are losing their freedoms decades after independence, in the new serfdom created by an elected parliament.
Rule of law or unruly legislation?
Retrospective taxes are even worse. They violate a fundamental principle of rule of law, which is predictability.
No free citizen should be subject to a rule that did not exist when he initiated an action.
Economist and philosopher F A Hayek in his work Road of Serfdom explains this way:
“Stripped of all technicalities [the rule of law] means the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge”
Retrospective taxes may be legislation but they are not laws in the sense of it being a just law that contributes to rule of law. Instead they are unjust sovereign commands that undermine rule of law by falling short of being a just law.
Retrospective taxes were invented in Europe just like post-feudal nationalist hate and Marxism. So was taxation by consent. But while Sri Lankan rulers are quick to deny taxation by consent – which enhances peoples’ freedoms – they are quick to impose retrospective taxes on the people.
The 2015 budget also contained billion rupee taxes against a sports channel, which was mis-using state resources and gaming firms which are clearly too large for those companies to bear. They were characterized by the opposition as revenge taxes.
If companies have ill-gotten gains, it has to be dealt with by the criminal justice system, not by arbitrary taxes. The origins of such taxes are also lie in the West, called windfall taxes.
Imposing taxes that may bankrupt companies goes not just against principles of parliamentary governance but also the historical governance principles practiced in the South Asia region even by feudal rulers.
This goes to show that legislation enacted by parliament can be even worse than feudal laws, just like post-feudal nationalism.
Milk and Honey
A billion rupee taxes a fundamental principle of tax law, going back thousands of years particularly in South Asia, which is the ability to pay.
"The Ruler should act like a bee which collects honey without causing pain to the plant," says the Mahabharata. In Anushasana Parva its 13th book the sage Bhishma further counsels Yudhishthira, likening tax collecting to a man milking his cow every day.
This principle that has also been articulated by Chanakya (Kautilya) in Arthashastra.
The rule of public finance embodied in the milk and honey analogy has been followed by Kings of Sri Lanka and India for centuries.
Even the International Monetary Fund now uses the principle as a basis for public finance in its handbooks, and Western countries follow the principle. It is a liberal rule of state restraint and public finance that the originated from this region and has spread to the entire world.
The irony is that it was a budget which was prepared by an administration that promised Yahapalanaya (Good Governance) that desecrated this ancient liberal principle of good governance with its tax proposals.
If Sri Lanka’s new rulers want to make the country into a land that flows with of milk and honey, where foreign and domestic investors will be clamoring to invest their money, creating jobs and prosperity, fiscal tyranny is not the way to go about it.
It can be inferred with a fair degree of certainty that Lichchavi kings would not have done it either.
This column is based on ‘The Price Signal by Bellwether‘ published in the September 2015 issue of the Echelon Magazine. To read Bellwether columns as soon as they are published, subscribe to Echelon Magazine at this link. The i-tunes app can be downloaded from here.