FT.com / Asia-Pacific - India plans to overhaul tax system.
India’s government has unveiled plans for a substantial reform of its archaic tax code, which it hopes will curb widespread tax evasion.
The reforms proposed by Pranab Mukherjee, the finance minister, .... plans to lower the tax rate for local companies from around 30 per cent to 25 per cent.
The government hopes that by lowering the tax burden and simplifying tax rules, more of its citizens will pay up in full, raising the government’s revenue base in the long-run.
This is to be welcomed.
But let no one say that this is Laffer inspired: it is not. Laffer said cutting rates on the same base increased revenue. This is cutting rates and broadening the base. Not the same thing at all.
I like as braod a base as possible over a wide range of taxes all at low rates.
People like the Taxpayer's Alliance call that double taxation. I call it efficient tax management, becasue it is.
This is good news in India.
It's a move other countries might follow.
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I’d say that having a wide range of taxes at low rates is anything but efficient tax management.
Every tax brings with it administrative costs, both in the public sector administration of it and the elements of the private sector which have to administer it. Those costs tend to be the roughly the same no matter what level the tax is set at, so the cost as a proportion of the amount collected will increase the lower the tax is.
In terms of cost efficiency, as well as reducing the invasion of privacy that the citizen is subjected to, it makes more sense to identify the taxes which are least harmful when levied and concentrate revenue raising on them, keeping the number of taxes as low as possible.
Paul
You assume tax is a bad thing when it is in fact a supplier of enormous benefit that people demand. So, your attitude is already out of kilter
Second – lots of low rate taxes produce reduced economic distortions and less incentive for evasion
That is efficiency
So overcome your blinkers – embrace tax as a good thing – and you’ll change your mind
Richard
[…] Tax Research UK » India to reform tax system […]
Richard: “You assume tax is a bad thing when it is in fact a supplier of enormous benefit that people demand. So, your attitude is already out of kilter”
Please don’t tell me what I think and if you have to do so, at least be accurate.
“Second – lots of low rate taxes produce reduced economic distortions and less incentive for evasion”
The point on economic distortions has some merit, but the reduced incentive for evasion is a weak argument. It’s far more efficient to reduce evasion by using those taxes which are least easily evaded than to take a scattergun approach.
“So overcome your blinkers – embrace tax as a good thing – and you’ll change your mind”
Maybe you should overcome your blinkers and address the arguments people put forward, rather than resorting to personal attacks.
I’m not going to embrace tax as a good thing, because that would be a foolish generalisation. It is just a thing. In some circumstances it might be a good thing, in others it might be a bad thing. I’ll continue to do the intelligent thing and address each individual case on its merits.
“Laffer said cutting rates on the same base increased revenue.”
No, he didn’t. He said that cutting rates on the same base *could* lead to increased revenue. It depends upon where on the curve you are.
John Maynard Keynes made the same point so it’s hardly a controversial one, is it?
But as you well know Tim, it’s the way you tell then
And in your hands good economics becomes bad politics
And Laffer’s interpretation of this didn’t even start as good economics
Every tax has an administrative overhead, so from that point of view the fewer different ones the better. As the French Physiocrats argued, all taxes are ultimately at the expense of economic rent of land, a point that is also implicit in Ricardo’s Law of Rent. So if the aim is only to raise revenue efficiently, optimise production and provide equal economic opportunity for all, then only one tax is necessary – a charge on the rental value of land. This would include things like road congestion charges, since road space has a rental value.
If you want to discourage things like boozing and smoking, then taxes on alcohol and tobacco are necessary. Systembolaget is not such a good idea when the state alcohol monopoly is expected to make a profit and then acts like any other off-licence chain.
Tax is a good thing provided the money is well spent, and there are some things which can only be provided by the community at large. Whether this should just go to providing high quality infrastructure or should extend to cradle-to-grave welfare is a separate question. It may be better to provide a basic income (out of land value taxation, of course!), and let people choose how to spend their share of national wealth.
But the first task is to reform tax systems so that they can raise substantial and reliable revenues in a way that does not have an adverse impact on economies.
Henry, at the moment some 40% of GDP is tax revenue. Personally there is nothing which is currently provided by the state in this country which I would prefer to be provided by the private sector. In addition I would like to see free higher education, free care for the elderly, a decent state pension, lots of good quality social housing, more social workers, smaller class sizes, free music lessons, beautiful public buildings, etc. Could resource rentals fund this? If not, I think that the idea of a single tax base, presumes a much smaller state than we have at present let alone what many of us would think necessary for a good society.
However, I agree that LVT has huge revenue raising potential and it is ridiculous that policymakers almost universally ignore the very best tax base there is – a direct tax on something which is, by its nature, totally immobile.
Carol, all taxes are at the expense of land value. As existing taxes come off, land values rise.
Also substantial public expenditure is required at present to alleviate the effect of the tax system eg unemployment at an absurdly high level, and about 40% of public expenditure comes back to the government in the form of taxes nominally paid by state employees. This is the inefficient process known as churning.