Thursday, January 9, 2014

Thinking of A Modern Non Pinching Taxation Regime? Transaction Tax Could Be the Answer !

Paying taxes to the government is an unavoidable responsibility of all citizens. Taxes paid by the citizens are used for the common benefit of all people. Hence, taxing the people by the governments cannot be avoided.

There could not be much dispute on this. All right thinking people should agree to this fundamental fact of social responsibility. 

But yet many people are scary and worried about taxation. They are annoyed with the governments for creating problems for them in the name of taxation. Governments world over have been in the practice of terrorizing their peoples with many kinds of regressive taxation and taxation laws. In reality, taxation laws are not essentially made with the sole objective of raising funds for the governments to function, but are also aimed for controlling the people with fear inducing whips of taxation laws laden with many kinds of punishments for the defaulters. Many times it is not enough to pay the taxes, but the citizens are forced to submit of file many kinds of reports, called tax returns, to the tax enforcing authorities and keep answering to various kinds of irritating questions from the latter.

This kind of a situation makes the lives of citizens miserable as they are forced to do complex documentation of accounts of  their incomes and expenditures which goes beyond their normal level of understanding and capabilities. The governments in turn are forced to keep a large work force of tax enforcers who simply add to the complexities are eat away the good portion of the taxes that are being collected by way of salaries and perks to this great work force attached to the taxation administration departments. Imagine the situation when the governments are spending the good amount of the taxes collected as costs for collecting the taxes!

The same tax administration then becomes the policy making authorities and advisers to the government and a complex system of regressive taxation gets perpetuates in the society. The citizens are becoming angry over their elected representatives who become more and more helpless to do any kind of creative reforms as they are more and more dependent on certain administrative organisations which had grown over to unmanageable levels with complex rules and regulations over the years. When expenses of the government increases every year, there is no other way than to tax the people more. When people are taxed more with more and more regulations, productivity of the people goes down and the tax collections decline compelling the governments to adopt more regressive laws with bigger administrative set ups. 

A vicious circle is formed in this process and the elected representatives who get in to the top positions of government becomes helpless to do any thing. The chances of the elected representatives knowing about a complex system of governmental finances are rare as they are representatives of the ordinary citizens. They could be good in criticizing a problematic governmental system with their high pitched voices to the full satisfaction of a good majority of the angry citizens. But when it comes to the question of making those very systems corrected the way they wish, things do not happen that way because they really do not understand the way out. Very often, their zealous attempts add up the complexities because of the lack of knowledge and competency that they and their supporting teams have in varying degrees.

As I have mentioned in some other blogs in these pages earlier, it is not very difficult to understand the difficulty one might face when he tries to remove the knots in an entangled web of strings. If he is an expert and knows the techniques, he could easily do it. Otherwise, he would make more knots and make the web more complex making it difficult for others with some expertise to try for some success. It happens in systems of human organizations as well.

In India, and for that matter in many other countries, the taxation laws are indeed regressive as it stands today. The taxation rates are too high and do not encourage honest tax paying. The tax collection costs are high. The collected taxes do not get evenly or justifiably distributed. The laws talks about only punishments punishments only and not of any incentives to any honest tax payer. High tax payers are treated as anti socials. Wealth generators and entrepreneurs  live under constant fear of the authorities because they could be harassed with the tax administration laws and treated like dreaded criminals.

Out of all regressive tax laws the income tax laws in many countries are draconian and do not exhibit any reflections of human civilization or culture. They surely reflect the legacy of the bloody past of the human race when they existed as warring groups with every man antagonistic to every other.

Modern tax laws such as the service tax laws too are becoming harsh and anti people and non-progressive with more negative qualities than positive attributes. 

Could there be any alternative where in governments could get the money they need and at the same time the money collection efforts do not harass the people in general. Could there be any system where in taxes could be collected without elaborate tax collection machinery? Could there be any system where in complex rules and laws are not required to be applied? Could there be any system where tax collection by the government is not very much felt by the people as pinching and painful?

It is possible in my opinion. But the only requirement in that case should be that the government should not think of using the law for the whimsical benefits of those who are occupying the seats of power and governance. They should not think of using the laws against some one whom they want to settle the scores. They should only think of getting the money needed to run the governmental functions smoothly and efficiently and nothing more than that. They should not have hidden agendas of using the laws for personal benefits or for perpetuation of corruption.

If they are honest in this, then tax laws could be much simpler. Tax collection would be simple and non pinching to the citizens. They also would not need huge establishments for tax administration which directly and indirectly cause peoples money to be wasted unnecessarily. All the more, governments and peoples' representatives that form the governments would less likely be treated as anti-people!

It is not that economists and leaders who are knowledgeable in economics do not understand these things. The Harvard educated economist and political leader in India, Mr Subramanian Swamy has favored the scrapping of income tax. Think tanks of major political parties are now realizing the anger of the people of India against the governmental establishments as reflected by the victory and popularity of the Aam Admi Party (AAP) and are seriously considering sweeping changes in the direct tax laws for gaining people's support to their favor. [Read : Can Income Tax Be Really Abolished in India?

As a common citizen who keeps a common sense  interest in the non-academic and theoretical aspects of economics, I do agree with the idea of scrapping the regressive income tax as it prevails in India. If it is done and replaced with some other indirect tax system it would definitely be of advantage to the citizens and the country.

But what type of an indirect tax? Some people have been suggesting expenditure tax. But I would rather suggest some kind of transaction tax for transactions of money done through banks. It could apply to all transactions of money transfer between accounts and could apply to the transactor at a low percentage of say 0.5 % of the amount transacted for any purpose. All transaction tax so collected by the banks should go to the government account periodically. All these accounting of deduction of transaction tax and transferring it to the government account should be responsibility of the banks done automatically through appropriate computer software systems.

This system would be equally applicable to all citizens and it is not so harsh in real terms. For large transactors the amounts would be large but for smaller transactors the amount of transaction tax would be negligible. The more the transactions, the more the tax, just as we have in the stock markets.

Assuming that I have a total income of Rs.1000000 per annum. When I get it I pay a tax of 1000000* 0.005 = Rs.5000. When I consume it by paying others, I pay another Rs.5000 and the government gets Rs.10000/- The more I transact, the more I pay taxes. If I get some interest of Rs.100000, I pay Rs 500 as transaction tax. Imagine the potential of collection of tax by the government and its easiness to implement! It is not going to pinch any one as the transactions are done distributively and the rates of transaction tax is low. When the present income tax is abolished, the whole of the income tax establishment and its maintenance costs could be saved. 

I know that there are those internal experts of the IT administration who might argue in favor of the income tax again by saying that the maintenance cost of income tax administration is much low. They say that it is less than 1%. Even then, is it necessary to harass the citizens in the name of income tax? Or is it prudent only to get the necessary income for the government for its necessary functions?

Of course, the people now associated with the income tax administration may not agree with this and they are very likely to find thousand and one reasons against any such new ideas. It is understandable.

But governments are required to work for the people and not for fulfilling some desires of some of its employees! No doubt, government employees are also citizens of the country. Their jobs need to be protected. But just for that avoiding some better system is not justifiable. Governments of modern civilized worlds should try to transform their functions as real service to its people in letter and spirit and not for ruling the people with their powers in the name of service. And public servants should be service oriented and not oriented dictatorially for each and everything. 

In a society which is a mixture of mature and immature citizens, the percentage of the latter exceeding much above the former, it may not be so easy for government staff to be gentlemanly always. There is a danger of the immature beings taking that gesture as a sign of weakness. Whips do have some pacifying effect on immature beings. But then only mature beings know how to use whips and carrots judiciously!

But in my personal opinion, a time has come to experiment with new systems of taxation. There is a need to change to a system which honors honesty and motivate mature people to function as living examples to those who are not so mature. And taxation laws should encourage people to enhance desirable and productive economic activities rather than discouraging. 

Of course, it would not be easy to discard income tax altogether and introduce a new taxation system such as the transaction tax. This has to be done in phases with proper studies conducted before implementation. But such studies should be done honestly by expert groups and not by any one who come up with their reports under duress and pressure, as usually done in such cases.

All the above are opinions and suggestions from an ordinary citizen of India. An aam admi to be more precise! 

And I know very well that there could be only a few other aam admi s (common people) who could understand and agree to what I have opined and no possible supporters from any of those who are in power positions of decision making!  

Because those enjoying power positions never have any time to listen to the aam admi s. Even otherwise, power positions do block the receptive faculties of human bodies!


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