Even if it does not exactly balance the Government’s books better, imposing higher rates of tax on the rich may have its political uses.
It is that time of the year when the Finance Minister is under more pressure than usual to come up with the fiscal equivalent of alchemy. He is expected to present to the nation, a picture of its finances that somehow looks better than it actually is. Unfortunately, he is really faced with a challenge that is more daunting than he, or those who preceded him, had faced in recent times.
Public finances are in disarray with the fiscal deficit threatening to run out of control and the RBI refusing to bend with interest rate cuts. Now, he has to additionally contend with a new found clamour of imposing stiffer rates of income tax, or at least a surcharge that has surfaced in public discourse leading up to the Budget. Not that such a levy is going to be of much help.
If there are any official statistics on the distribution of tax payers across income levels, it is one of the best kept secrets in recent times.
Appearances are everything
Many years ago, the Department of Revenue used to disseminate data on tax collections to reassure the public on what a great job it was doing in the cause of nation-building. But of late, it has been so afflicted with the virus of ‘modesty’ — and, that too, of a particularly virulent type — that it shies away from advertising its achievements except in the broadest possible terms.
But some news report had it that there are roughly about four lakh people declaring a taxable income of Rs 20 lakh and above. If that is so, how much can you really levy as additional taxes and garner extra revenues, as a consequence? A couple of thousand crore, at best.
But like politics, in fiscal management too, appearances are everything. An appeal to the nobler sentiments of the ‘super rich’ might achieve the twin objectives of retaining the faith of the middle-classes, while refurbishing the Government’s image as one committed to restoring the nation’s fiscal health.
Not a done deal
If, on the other hand, the upper middle-classes are not that easily persuaded, it still shouldn’t matter for the UPA Government in its larger scheme of things.
The 2G scam and the Anna Hazare movement have done enough damage to the image of the present Government among the urban chattering classes. And now the ‘helicopter’ scam has descended on them to further dent its prospects.
As scams go, there couldn’t have been a worse instance of public procurement in which the Government would be accused of having dipped its hands in the cookie jar.
Look at it this way. The public would be saying, ‘‘It is bad enough that you should be squandering public money on such luxuries as a VIP squadron of helicopters.
To be seen as padding up that cost with kickbacks is even worse.” In that sense, for the UPA, it is the equivalent of the scam that the previous NDA Government stood accused of, in the deal for emergency procurement of military coffins for Kargil war heroes.
So the bottomline is this. The UPA could take the view that the urban middle-classes wouldn’t be voting for them anyway.
So the idea must therefore be to capture the imagination of the rural voters into continuing to back it with some policy innovation that sends out a powerful signal.
Soaking the ‘super rich’ with more taxes may have its political uses even if does not exactly balance the Government’s books better.
Growth and tax rates
But politics apart, is there a case for calling upon the ‘super rich’ to bear a higher burden of expenditure on social and economic development through extra contribution to the tax revenues?
That depends on how one views the economic growth in the post-90s era of liberalisation; the degree of reduction in tax rates across different income slabs, and so on. Consider an economy of just two tax payers A and B, with A earning Rs 10,000 and B, Rs 25,000. A’s income is subject to an average tax rate of 10 per cent and B’s income suffers a tax rate on the average at 20 per cent.
The average tax-GDP ratio would now work out to about 17 per cent (Rs 6000/Rs 35000).
If both the incomes had doubled in the last 20 years and if the tax-GDP ratio had remained the same, it is reasonable to assume that the State had been even-handed in its treatment of these two income earners. (Of course, the State can be perverse in extracting a disproportionately higher tax on A and a more benign one on B.) We can however rule that out in this case.
If the growth in the last two decades or so has been uniformly distributed across different classes of society and the income tax rates been equitable across income slabs, then it is a simple question of measuring the tax-GDP ratio in the year 1989-90 (the year immediately preceding the crisis year of 1990-91) and 2011-12. If the ratio hadn’t undergone significant change and if rates of taxes across income groups in the initial year had been progressive (higher tax rates on the rich), then it follows that the post-reform years hadn’t resulted in the State extracting a lower share from the rich compared to those in the middle and the modestly-rich groups of tax payers.
Decline in tax-GDP ratio
As it happens, far from any increase, there has actually been a marginal decline in the tax-GDP ratio in this period from 10.25 to 10.09 per cent.
But this is the point. The successive increases in nominal output during this period (in the terminal year alone, such incremental output had been higher by Rs 83.55 lakh crore compared to the base period of 1989-90) had been skewed towards those in the upper income groups.
Forget about Gini Coefficient or some such exotic measure of inequality.
Companies in the FMCG and consumer durables market have noted with obvious satisfaction that they have been able to register higher growth rates in the sale of their premium products than those in the mass market.
The growth in flat panel TVs, high-end refrigerators have been better than those of plain vanilla 21 inch colour TV or the 165 litre fridges.
So if the tax-GDP ratio has remained more or less constant and incomes have accrued to a greater degree to those in the upper-income brackets, it follows that their contribution to the central tax kitty has gone down.
Interestingly, the record of the States has been marginally better. Taxes, other than those on liquor, during this period have gone up from just around three to 3.77 per cent of the total national output.
The excise collections on liquor — a levy that is notoriously anti-poor if ever there was one — have gone up at a much faster rate. But that, of course, is another story.
I must, however, enter a caveat here.
Though you wouldn’t find me adding to the queue in front of the soup kitchen of the Salvation Army for my morning meal, I don’t drive a Ferrari either.