ATIC Tax Agents

Why does Bangladesh tax so little?


Tax morale – citizens’ willingness to pay taxes – depends on the trust they have in the government and the quality of services they receive. Corruption, especially extreme levels of corruption can significantly erode people’s trust in the system leading to tax evasion. On the other hand, corruption in tax administration can also create opportunities to evade taxes. Corruption, therefore, can be both a reason and a tool for tax evasion. It depresses tax morale and discourages people from paying taxes, and then provides a cost-effective way to do so.

Corruption and taxes around the world

Corruption is correlated with tax to GDP ratio (Figure 2). When taxpayers believe they are living in a corrupt state, their willingness to comply with tax authorities decreases. The level of informality in an economy is also seen as a major reason behind the disparity in tax levels among economies at a similar level of development.

Corruption suppresses tax morale in Bangladesh

Bangladesh has a reputation as an endemically corrupt country. For five consecutive years between 2001-05, Bangladesh was ranked as the most corrupt country in the world. The situation has not improved much as Bangladesh remains one of the more corrupt countries. This sticky reputation for corruption is not without reason and high-profile corruption scandals raise questions over the appropriation and use of taxpayer’s hard-earned money.

Cost overruns in government projects is a common phenomenon in Bangladesh. Figure 3 shows such instances in four large government projects. The government justifies such cost overruns, which could be as high as 10 times the original budget, citing depreciation of the local currency and various design changes. However, one major reason behind depreciation of local currency is the delay in implementing projects. Bangladesh Taka (BDT) tends to lose value against US$ with time. This means delays make the projects costlier. For example, Padma bridge, a project which ended up costing almost US$ 3 billion instead of around US$ 1.2 billion. It was inaugurated in 2022 although the original project completion date was 2014.Such overruns are not limited to large projects. This is common among projects with costs ranging from US$ 10 million to US$ 12 billion.

The push to raise taxes in Bangladesh is contemporaneous with these excesses in government spending. Unsurprisingly, people are reluctant to forego their earnings only to see them squandered, pushing taxpayers to seek out ways to evade taxes.


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