Nobel

Abhijit Banerjee

taxing

India

ThePrize winning economistin a series of interviews has talked about raising the taxes on the rich and businesses in order to fund the welfare state.Like almost everything else, there are economists on both sides of the argument. There are those who like the idea of higher taxes on the rich, financing the welfare state and there are those who don’t.The arguments offered by those in favour of higher taxes go somewhat like this. As Jonathan Aldred writes in Licence to be Bad—How Economics Corrupted Us: “In the modern world all economic activity reflects the influence of the government. There is no such thing as income earned before government comes along.”The influence of the government comes through functioning “economic and social infrastructure, including transport networks, communication systems, energy supplies and extensive legal arrangements covering complex matters such as intellectual property, formal markets such as stock exchanges, and jurisdiction across national borders.”As Aldred summarises it: “It is impossible to isolate what is ‘yours’ from what is made possible, or influenced, by the role of the government.”Also, there is the point about how those paying higher taxes need not feel frustrated about it. As Aldred writes: “If everyone’s income rises, the question of who gets which house remains unchanged. House prices rise, though: we all have to spend more to get the same house… If everyone then pays more tax, the opposite happens. Post-tax incomes fall ,who gets which house remains unchanged.”The larger point here being that paying more tax does not mean that the living standards come down, as the relative position of those paying higher taxes remains the same.These arguments sound extremely logical. Businesses and individuals do not operate in isolation. They take a lot from the society and taxes in a way are their way of giving back.In the Indian case there are a few problems with these arguments.Let’s first take a look at individuals paying income tax. For the assessment year 2018-2019, the latest data available, there were only 97,689 individuals who declared an income of greater than Rs 1 crore. This in a country with a population of 130 crore.Of those who declared an income of more than a crore, 89,793 declared an income of less than Rs 5 crore. Income tax returns for the income earned during the financial year 2017-2018 were to filed during assessment year 2018-2019.The point here being that less than a lakh Indians declare a taxable income of greater than a crore. Of these individuals, 49,128, or a little over a half, earn a salaried income. What this tells us very clearly is that many Indians simply don’t declare their right income. In this scenario, higher taxes will just discourage people from declaring their right income in the first place. Higher taxes on the rich, would meanthe salaried rich more than the others.Aldred and other economists who pay higher taxes talk about the government providing the necessary infrastructure which allows businesses to carry out business, properly. In, that isn’t totally true. The legal infrastructure sucks. Contracts are not respected. Transport infrastructure isn’t totally up to the mark. Port infrastructure takes too much time to turn around. There is too much interference on the part of the government (both central and state) when it comes to running a business.On top of this, if there is a higher income tax to pay as well, how will Indian businesses ever compete? Take the case of the trade deficit in goods that India runs with China. This basically means that India imports much more from China than it exports to the country. In 2018-2019, India’s trade deficit with China was around $53.6 billion. In 2017-2018, the trade deficit had stood at $63 billion.Now imagine a situation where the corporate rate of income tax was much higher than it currently is. It would have meant that more Indian goods would not be able to compete against Chinese goods and we would have ended up importing even more from China than we actually did.This also tells us that the answer to most questions in economics is, that it depends.