To tax or not to tax are the eternal questions before any government and to-pay-or-not-pay is the eternal difficult choice before the people.
Historically taxation has been the cause of much strain between governments and its citizens. It also is one of the main causes of black money and corruption.
What is the solution? Can low taxes solve this problem? But, how will the Government raise revenue for its expenses?
Let us look at some examples of what happens when Governments lower taxes. We will start very near before we go very far.
Delhi’s AAP Government’s experiment in lowering taxes is a recent example closest to home. They became the lowest tax regime in the country when they slashed VAT ( before GST) from 12.5% to 5% in its 2016 budget on many consumer goods like Sweets, savories, snacks, sanitary napkins, shoes, Ready made garments, e-rickshaws marble, kota, dholpur stone, granite, MDF boards & particle boards, laminates, plywood, blackboard and gave subsidies for battery operated cars. This was a bold decision because 65% of the State’s revenue comes from VAT.
The logic was that compliance will go up and lower taxes will encourage production and consumption.
Instead of revenues falling, the Govt collected 21% higher revenue as compared to previous year. Which is a lot, if you consider that the previous year they registered a growth of 13% and when VAT was higher.
Delhi also became a state with highest GDP in the country in spite of demonetisation which saw a dip in GDP by 2% in the entire country. Furthermore, if low taxes are clubbed with plugging of leakages in revenue then it is a win-win situation for all. For example, the Delhi Jal Board registered increase in revenue in spite giving 20,000 litres/month free water to those who had metered connections. This gave a spurt to people requesting for metered supply and the estimated enormous Rs. 20,000 crore worth of water leakage was plugged. New pipe lines in 263 colonies were laid ( something that had not been done in last 10 years) and revenue through water went up in spite of the free water.
Now let us move from the near to the far. Dr. Ronald D. Rotunda, distinguished Professor of Jurisprudence, writes in an article defending low taxation, “It is said that tax has two purposes: to raise revenue for the Government and to reduce activity of the people. For eg, alchohol, tobacco etc is taxed high not so much to increase revenue but to discourage activity that is taxed, to change behaviour.”
He argues that lower tax rates can produce more revenue than higher rates just as cheaper Wal-Mart makes more money than Tiffany & Co. When USA lowers the capital gains rate, it collects more than when it raises it, he writes.
So also, high taxes makes people go in for secure investment rather than investing in business which carries risk factors or they simply take their monies to safer heavens resulting in cat-and-mouse chase between people and Governments across the globe as the recent Paradise Paper or earlier more such exposes reveal.
Daniel Mitchell, former McKenna Senior Fellow in Political Economy writes, “ There is a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase. Lower tax rates do not mean less tax revenue
Therefore, when there was a successful experiment of the Delhi Govt right under their nose, one wonders why the Prime Minister and Finance minister opted for turning India into the highest paying GST in the world, especially since the nation is reeling under demonetisation and fallen GDP.
Lower lax rates will lift sagging sentiments, spurt investments and maybe prove that Indians are not inherently dishonest, as the Delhi AAP experiment has proved.