PROGRESSIVE PERSONAL INCOME TAX AND IMPACT ON MACRO ECONOMIC FACTORS IN SRI LANKA

Abstract

Purpose: The purpose of this study is to explore the impact of progressive income tax on macroeconomic factors in Sri Lanka. Specifically elaborates, though income tax is an effective mechanism for fiscal deficit, still it creates adverse effect on other macro-economic factors. Design/Methodology/Approach: This exploratory study employs time series data with the data span from 2008 to 2022, which is 15 years. The data of concerned variables of tax revenue and professional migration were extracted from Inland Revenue Department and Sri Lanka Bureau of Foreign Employment. Findings: APIT has failed to fulfill the qualities of the effective income tax system. As depicted in Laffer curve, due to higher tax rates, future income tax revenue will be lower due to the negative impact it has on professional migration, job performance, investments, savings and other macro-economic factors Practical Implications: Despite being a tool to recover from fiscal deficit, increased tax rates can worsen the recovering economy. This study encourages the government to reformulate viable tax policies without hindering the long-term sustainability of the economy. Research Limitations: The relevant data was insufficient to test the casual relationships between variables and this study can be further developed with adequate data to understand the level of impact. Originality/Value: This exploratory study extends the knowledge on the impact of personal income taxes while the country is recovering from economic crisis which is new in terms of degree of change in tax rates and intensity of the economy.