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Spurring development with more taxes It sounds paradoxical, the idea that collecting more taxes from citizens can boost growth. However, in poor countries lacking basic infrastructure where taxes net far too little revenue, improving tax income can increase private investment rather than dissuade it. When private firms have talent to hire and dependable infrastructure, they will invest more, creating the jobs and industry that generate growth. Rich countries on average collect taxes equivalent to about 35% of GDP, whereas in poor countries the number is closer to 13% of GDP. Middle-income countries, where Sri Lanka now belongs, collect around 20% of GDP equivalent in taxes. Sri Lanka’s tax collections at 11.2% of GDP in 2015, lower even than the Sub-Saharan Africa average, makes it difficult for the state to invest in education, healthcare and infrastructure, which in turn spurs private investment and growth. Poor country tax collections are low because most of the population is poor. In middle-income countries many more people should be able to afford to pay taxes. Sri Lanka’s tax rates are reasonably competitive and don’t explain, on the face of it, why they net so little revenue. As our story this month points out, tax dodging is widespread, the system has too many loopholes and tax collecting agencies lack autonomy and the capacity to be effective. If these could be fixed higher income tax collections should spur growth and benefit everybody.

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