The Hindu Business Line : `Enforcement warrants lower tax rates to optimise revenue'

Nobel laureate Prof James A Mirrlees, flanked by the FICCI President, Mr Onkar S. Kanwar (right), and the Secretary-General, Mr Amit Mitra, at a conference in the Capital on Friday. — Kamal Narang

New Delhi , Sept. 16

NOBEL laureate Prof James Mirrlees today held out the view that in countries where tax evasion and corruption are pervasive, higher tax administration costs should dictate relatively lower tax rates on goods. Where enforcement is introduced, the rate should be lower to ensure that the revenue to the Government increases.

Delivering a lecture organised by the Federation of Indian Chamber of Commerce and Industry on `Raising tax revenue in developing countries', Professor Mirrlees of the Chinese University of Hong Kong, said, the "optimal tax" prescription for developing countries like India should be one where the marginal tax rates on income do not vary very rapidly with increasing income.

While recommending basic subsidies for all at the same rate, Prof. Mirrlees said, he subscribed to the view that a commodity should be taxed at a higher rate only when it causes social damage such as pollution, road congestion or ill health.

Drawing a comparison between the tax ratio of India and China, Prof Mirrlees said, from 1998 to 2003, tax revenue grew by 12.6 per cent annually in India, against a growth of 17.3 per cent in China. In both countries, compared to most developed countries, taxes are still a small proportion of GDP, even if social insurance contributions are factored in.

Responding to a query on the optimum rates for income-tax and corporate tax for developing countries, Prof Mirrlees said taxes should not interfere with production efficiency, which means there should be no taxes on transactions between producers, on the one hand, and on exports or imports (exception when there is a monopoly), on the other.

This theory, he pointed out, was based on the assumption that it is possible, and not costly, to tax all transactions. Prof Mirrlees said that since developing economies have a large informal sector and transactions among small firms and individual producers are poorly recorded and, thus, not easily observable by the tax authorities, a possible answer was to tax detectable transactions on sales by large firms and have different rates for different goods.

Dispelling the popular misconception that export taxes are paid by exporters, Prof. Mirrlees said, the incidence of these taxes is actually on workers and capital producing the goods.

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