Taxation Policy, Social Expenditure and Inequality – Global Trends and the Case of Sri Lanka

This paper uses the case of Sri Lanka to examines the inter-connections between taxation and social expenditure on one hand and patterns of social inequality on the other, based on secondary data derived from official sources. Persisting low direct taxes on personal and corporate incomes combined with an overwhelming reliance on indirect taxes continue to impact negatively on the life chances of low income groups and other vulnerable segments of society. On the other hand, continuing low social investments in such areas as health, education and public transport have lowered the quality of publicly funded services, compelling even low income groups to rely more and more on privately provided services. Poor social regulation of private services has resulted in higher charges levied by private providers, resulting in an increasing economic burden on low income groups. Meanwhile, more and more low income groups have tended to look for more lucrative employment outside the country as a way of coping with increasing cost of living. Exodus of labor in turn has led to wage escalation and labor shortages, making local production of industrial and agricultural goods less competitive in regional and global markets. Resulting stagnation of industrial and agricultural sectors has forced many workers to move into the informal sector, making their working and living conditions increasingly precarious. The emergent situation demands greater state regulation of income distribution, surplus extraction and private provision of social sector services and social sector investments.

After describing the case of Sri Lanka, the paper will discuss the findings in the context of the dominant global and regional market trends and policy environment that do not encourage greater and more proactive state interventions in the above regard.