Taxation without motivation: Time for a new social contract with taxpayers?

The national budget for fiscal year 2026–27, amounting to Tk 9.38 lakh crore, has generated considerable discussion among economists, policymakers and business leaders regarding revenue mobilisation, spending priorities and implementation challenges. The success of any national budget generally depends on the government's ability to mobilise resources efficiently and use them effectively. 

In Bangladesh, as in many developing economies, tax revenue plays an important role in public finance. Expanding the tax base and improving compliance have therefore become central policy objectives. However, policymakers often focus exclusively on increasing collection while paying insufficient attention to the motivations of those who contribute to the system.

The fundamental question is simple: why should citizens willingly pay taxes?

Traditionally, taxation has been viewed as a civic duty rather than a transaction. Citizens contribute according to their ability, and governments use those resources to provide public goods and social welfare. In theory, this arrangement benefits society as a whole. In practice, however, perceptions matter. When taxpayers feel disconnected from the benefits generated by their contributions, taxation gradually transforms from a social responsibility into a financial burden.

To facilitate a broader understanding of the budget, the Economics Department of Independent University, Bangladesh (IUB) organised a budget dialogue titled "Resource Mobilization, Prioritization and Implementation", where leading economists and policy experts examined the strengths and weaknesses of the government's fiscal plan. The discussion covered familiar themes, including tax administration, project selection, energy reform, market management and growth prospects. Yet one issue remained largely absent from the conversation: the growing frustration of individual taxpayers.

During the budget discussion, one of the speakers remarked that taxes collected from affluent residents of Dhaka's elite neighbourhoods may ultimately finance welfare programs for poor families in remote districts. The statement reflects an important principle of redistribution that exists in every modern economy. Yet it also reveals a significant policy challenge. If taxpayers perceive themselves only as contributors and never as beneficiaries, their willingness to participate voluntarily in the tax system inevitably weakens.

Bangladesh's current tax structure is largely built on this one-way understanding of taxation. Taxpayers contribute to government revenue but receive little direct recognition or support in return. Public services such as roads, security, education and healthcare are available to all citizens regardless of tax status. Social safety net programs are primarily targeted toward low-income households, while middle- and higher-income taxpayers are generally expected to rely on their own savings during periods of illness, unemployment or retirement.

This arrangement creates a sense of vulnerability, particularly among middle-income families and private-sector professionals. A government employee may expect pension benefits and post-retirement support, but the private-sector employees face an uncertain future once employment ends. Years of tax contributions do not necessarily translate into additional healthcare support, retirement protection or priority access to public services. 

As a result, many taxpayers perceive income tax not as a contribution toward a shared national project but as an unavoidable deduction from their earnings. Bangladesh, therefore, faces a challenge that extends beyond tax rates and collection mechanisms. The country must strengthen the social contract between the state and taxpayers. 

Under the personal income tax regime for fiscal year 2025–26, individuals earning up to approximately Tk 29,000 per month were exempt from taxation. As income increased, taxpayers moved rapidly into higher tax brackets, leading to sharp increases in effective tax rates for relatively modest income gains. The largest relative increase occurred among lower-middle-income earners moving from the lowest taxable bracket to the next one, creating a disproportionate burden on emerging professionals and salaried employees.

The 2026–27 budget introduces some relief by increasing the tax-free income threshold to approximately Tk 33,000 per month. This adjustment is welcome and reflects the realities of inflation and rising living costs. Nevertheless, the broader structure of the tax system remains largely unchanged. Individuals earning around Tk 58,000 per month face an average tax burden exceeding 4%, while those earning approximately Tk 92,000 per month pay more than 8% on average. For many urban households facing rapidly increasing housing, healthcare and education expenses, these tax liabilities are far from insignificant.

The burden becomes considerably heavier for upper-middle-income professionals. Individuals earning approximately Tk 3 lakh per month will pay close to Tk 60,000 in monthly income tax, while those earning Tk 4 lakh per month will contribute around Tk 90,000 each month under the new structure. Compared with the previous fiscal year, taxpayers in these brackets will experience a noticeable increase in their tax payments. Although such contributions are justified under progressive taxation principles, they can create resentment if taxpayers perceive little value in return.

This issue is particularly important because Bangladesh's formal tax base remains relatively narrow. A small proportion of citizens carries a disproportionately large share of the country's direct tax burden. Over-reliance on this group without providing incentives risks discouraging compliance and encouraging tax avoidance rather than expanding voluntary participation.

The solution is not necessarily lower tax rates. Rather, Bangladesh should explore ways to make taxation more meaningful for those who contribute consistently. One possible approach is to introduce taxpayer recognition and benefit programs. 

For example, registered taxpayers could receive priority access to selected services in government hospitals or public institutions. Long-term taxpayers with strong compliance records might qualify for limited healthcare assistance, particularly during serious medical emergencies. Senior citizens with substantial lifetime tax contributions could become eligible for modest retirement support after reaching a certain age. These benefits would not need to be financially burdensome for the government; their symbolic value alone could strengthen taxpayer confidence and trust. The common principle underlying these systems is simple: taxpayers should feel that they are participants in a reciprocal relationship rather than merely sources of revenue.

Shahriar Kabir is a Professor in the Department of Economics at Independent University, Bangladesh (IUB). Email: skabir@iub.edu.bd

Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.