Sri Lanka cannot tax its way to prosperity

• Sri Lanka’s future lies not in isolation, but in deeper integration with global markets 
• Many young Sri Lankans increasingly conclude that the only viable path to a stable middle-class life is migration

For many young Sri Lankan couples today, owning a small car, purchasing a modest home, raising a family, or building middle-class security increasingly feels less like a realistic ambition and more like an unreachable dream. An entry-level car that may cost between USD 6,000 and 8,000 in India, around USD 10,000 to 12,000 in China, or around USD 20,000 in the United States can cost vastly more in Sri Lanka once taxes, duties, levies, and charges are added. Housing, too, has become prohibitively expensive relative to incomes. Even an ordinary family meal at a restaurant now often comes with taxes and service charges that significantly increase the final bill, placing additional strain on already stretched household budgets. 
A society in which ordinary middle-class aspirations steadily recede eventually becomes a society defined by frustration, outward migration, and declining confidence in the future. 
Many young Sri Lankans increasingly conclude that the only viable path to a stable middle-class life is migration abroad. Yet even that option is becoming more competitive and uncertain. 
This is no longer merely an economic issue. It is becoming a question of national morale, social stability, and long-term direction. 
Sri Lanka today stands at a critical economic crossroads. The country has stabilised after a severe economic crisis, yet stabilisation alone is not recovery. No country has ever taxed, regulated, or bureaucratised itself into sustained prosperity. Recovery requires growth, confidence, investment, and entrepreneurship. 
There is an increasing tendency among policymakers, parts of the corporate sector, international institutions, and segments of civil society to assume that higher taxation and expanding regulation are unavoidable features of recovery. This assumption deserves challenge. 
I had the privilege during the 1980s of listening directly to economist Arthur Laffer and journalist Jude Wanniski during the Reagan-era debates on taxation, incentives, and growth. At the time, the so-called Laffer Curve challenged the prevailing orthodoxy that governments could endlessly raise revenue without weakening economic incentives. 
Today, there is renewed global recognition that excessive taxation and overregulation can undermine investment, reduce competitiveness, encourage capital flight, and ultimately weaken rather than strengthen fiscal outcomes. 
Sri Lanka must engage seriously with this debate
Sustained investor confidence is unlikely unless taxes, tariffs, and para-tariffs are meaningfully reduced and simplified. Capital is globally mobile. Investors and skilled professionals increasingly choose jurisdictions that reward enterprise rather than penalise it. 
High taxation does not only reduce disposable income. Over time, it weakens risk-taking, discourages investment, encourages informality, and steadily erodes economic dynamism. 
This burden is particularly severe in smaller economies where domestic purchasing power is already limited. When taxes accumulate across imports, production, services, and consumption, the final cost of living rises far faster than wages. The result is a gradual hollowing out of the middle class and a weakening of domestic demand, both of which are essential for long-term economic resilience. 
In the digital economy, taxation itself is becoming increasingly difficult to enforce effectively. Cross-border digital services, online commerce, remote work, crypto assets, and stablecoin-based transactions allow capital and income to move across jurisdictions with unprecedented speed and opacity. Excessively high or complex tax regimes often encourage tax avoidance, informal economic activity, and capital migration into decentralised financial systems that are far harder for governments to monitor or regulate. 
Sri Lanka cannot aspire to become a regional logistics, commercial, or financial hub while maintaining one of the most complex and high-cost operating environments in the region. 
The ease of doing business must improve significantly. Regulatory overload, outdated legislation, and excessive approvals impose hidden costs that function as a form of taxation. Time itself has become a tax. 
The government should adopt a de-bureaucratisation principle: every new regulation introduced should require the repeal of an existing one. The aim must be a leaner, faster, and more competitive state. 
Taxation itself also requires simplification. The current fragmented system of taxes, levies, and administrative charges should be rationalised into a smaller number of lower, transparent, and predictable taxes. Predictability often matters more to investors than short-term incentives. 
Sri Lanka should benchmark itself against successful global hubs such as Dubai, Singapore, Hong Kong, and India’s GIFT City. These economies were deliberately designed to reduce friction, simplify taxation, and integrate efficiently with global capital and trade flows. 
Many Sri Lankans working in these jurisdictions understand first-hand the difference: speed, clarity, and predictability versus delay, complexity, and uncertainty. 
Sri Lanka’s future lies not in isolation, but in deeper integration with global markets, supply chains, investment networks, and emerging trade architectures. The country should actively pursue a network of strong and commercially meaningful free trade agreements, including engagement with major regional frameworks such as the Regional Comprehensive Economic Partnership (RCEP). In the emerging geo-economic order, countries that successfully integrate themselves into regional production systems, trade corridors, digital economies, and investment ecosystems are likely to prosper, while those that remain inward-looking risk long-term marginalisation. 
Equally, lower taxes must be matched by fiscal discipline. Without controlling expenditure, tax reductions alone are unsustainable. Sri Lanka’s public sector has become large, costly, and inefficient. 
A shift toward zero-based budgeting—where expenditure is periodically justified from first principles rather than carried forward automatically—should be seriously considered. 
There is also growing public exhaustion with rising taxation, particularly consumer taxes that directly affect daily life. Businesses and households alike face a system where the cumulative tax burden is felt in almost every transaction. 
The impact is no longer abstract. It directly shapes life choices
For young people, the erosion of affordability is stark. The gap between income and aspiration has widened sharply. Traditional markers of middle-class stability are becoming harder to achieve. 
This is not just an economic distortion but a social one. When aspiration weakens, societies begin to lose their forward momentum. 
International financial institutions, including the IMF, understandably prioritise macroeconomic stabilisation during crises. 
In practice, however, this often translates into a demand compression strategy: reducing consumption through higher taxes, tighter monetary policy, subsidy cuts, import restrictions, and reduced public spending in order to stabilise external balances and restore fiscal credibility. 
Such measures can temporarily reduce pressure on foreign reserves and inflation. But demand compression is not, by itself, a growth strategy. It is often used because governments prove politically or institutionally unable to undertake deeper structural reforms that would reduce inefficiency, corruption, waste, and the long-term cost of the state itself. 
When governments cannot sufficiently reform loss-making state enterprises, rationalise bloated bureaucracies, improve productivity, or reduce systemic leakages, the burden shifts instead onto households and businesses through taxation and reduced purchasing power. 
The result is that ordinary citizens effectively absorb the adjustment cost for institutional failures they did not create. 
Over time, prolonged demand suppression can weaken entrepreneurship, reduce domestic investment, shrink the middle class, and create a low-growth equilibrium where stabilisation exists statistically but economic vitality steadily deteriorates. 
Stabilisation without growth eventually becomes stagnation
Sri Lanka has experienced variations of this cycle repeatedly. Fiscal tightening, followed by fatigue, followed by policy reversal, has become a familiar pattern. 
The real challenge is therefore not stabilisation alone, but building a durable growth model rooted in competitiveness, investment, and productivity. 
Civil society also has a role. Sri Lanka requires a broader debate on the size and role of the state, and a more active voice advocating for economic freedom, entrepreneurship, regulatory simplification, and lower taxation. Trade chambers, business associations, and professional bodies should also more actively advocate policies that reduce the tax burden and improve competition, rather than treating ever-higher taxation as inevitable. 
Ultimately, Sri Lanka’s success will depend on whether it can create an environment where talent, capital, and enterprise choose to stay rather than leave. 
The country has significant geographic advantages, human capital, and a strategic location. But these strengths can only be realised in an environment that encourages rather than constrains economic activity. 
If Sri Lanka is to become a logistics, commercial, or financial hub in the Indian Ocean, incremental change will not be enough. A structural shift is required toward lower taxes, simpler regulation, freer markets, and a more efficient state. 
Without this transformation, stabilisation may be achieved on paper, but genuine economic renewal will remain out of reach. 
(Milinda Moragoda is the Founder of the Pathfinder Foundation. Can be contacted via [email protected])