Fiscal adjustment and distributive justice should go together. Hence, a marginal tax rate of 40 per cent should be applied on the super rich.
It is hoped that the Budget for 2013-14 will respect the need for fiscal integrity and equitable burden sharing of the pain of fiscal adjustment.
Macroeconomic Deception
Fiscal adjustment is set out in terms of attaining a medium-term objective of reducing the gross fiscal deficit (GFD) to Gross Domestic Product (GDP) ratio over a five-year period, from 5.3 per cent in 2012-13 to 3.0 per cent in 2017-18. The nominal GDP is so large that an infinitesimal variation in this number can enable the attainment of the desired GFD-GDP ratio. The ratio of GFD to total expenditure, as per the Budget estimate for 2012-13, was 34 per cent, which is unsustainably high.
Furthermore, there can be a throw-forward of expenditure which can facilitate the attainment of the desired objective. Again, food, fertiliser and fuel subsidies can be tossed around in a manner which is less than transparent.
Thus, the quality of fiscal deficit is as important as its size. It is not as if the Indian fiscal has less integrity than in other countries. Subject to these limitations, one would wish to see an equitable burden sharing of the fiscal adjustment.
A Regressive Fisc
The Indian fisc is highly regressive in that tax receipts are approximately equally divided between direct and indirect taxes. It is one thing to enhance ‘sin’ taxes (liquor and tobacco) and quite another to raise indirect taxes across the mass consumption basket.
As part of distributive justice, the Government should bite the bullet and tighten direct taxes where there are glaring gaps, while easing the burden on the relatively vulnerable segments. A higher income tax slab of 40 per cent could be introduced for annual incomes above Rs 25 lakh. Responsible industry leaders in the US, Germany and France have themselves suggested higher taxes for the ‘super-rich’.
Vinita Bali, Azim Premji and Kris Gopalakrishnan have endorsed the case for higher taxes for the ‘super-rich’. Intemperate articulation by some captains of industry that there would be massive flight of capital is mere hot air.
The Government should refrain from an income tax surcharge as it is biased against the States, as the Centre expropriates the entire receipts under surcharges.
Inheritance and Gift Tax
The mere talk of an Inheritance Tax by C. Rangarajan and P. Chidambaram, on the ground that the next generation has not created the wealth, has generated apoplexy among the ‘super rich’.
The Finance Minister could announce that, in principle, it has been decided to introduce an inheritance tax and that the specifics would be announced after a full scheme is drawn up.
A tax of 30 per cent could apply on estates in excess of Rs 10 crore and the only exception should be a self-occupied 1,500 square feet dwelling.
It is imperative that the present exemption for gifts to a long list of relatives should be scrapped and all gifts taxed at a flat rate of 10 per cent, which will enhance the time value of tax receipts, rather than a higher collection under an inheritance tax.
Dividend Tax
At present, there is a dividend distribution tax (DDT) of 15 per cent (plus surcharges). Dividends in excess of Rs 5 lakh should be subject to an income tax of 15 per cent.
The total exemption of dividends from income tax is a fiscal atrocity, which should be rectified, but the Finance Minister is unlikely to agree to this measure. Hence, the least that could be done is to raise the DDT to 20 per cent.
Standard Deduction
It is time the Government recognised that abolition of the standard deduction for employees was an error and this should be restored.
There is a case for enhancing the present Rs one lakh 80C deduction to foster savings. But it is essential to appreciate the time cycle of savings. Accordingly, there should not be a 80C deduction for senior citizens but a pro tanto increase in the general exemption limit for senior citizens to the extent of the 80C deduction.
Inflation Indexed Bonds
The Budget should announce the introduction of a five-year IIB with a limit of Rs 5 lakh per individual. If the cumulative inflation over five years is 40 per cent, on a face value of Rs 100, on maturity, the holder should get a redemption amount of Rs 140.
The indexation should be on the Consumer Price Index (CPI). If the real interest is fixed at 3 per cent and the CPI inflation is 10 per cent in a year, the holder should receive Rs 13 as interest on a face value of Rs 100.
Per contra, if the inflation rate is only 4 per cent, the holder would be paid an interest rate of 7 per cent. An IIB is an incentive for government to bring down the inflation rate.
The Budget of February 2013 is a make or break one for the government.
If hard options are followed, the Government would realise gains, but if it goes in for soft options, the Government will pay a high price in 2014.
(The author is an economist.)
Keywords: fiscal integrity, Fiscal adjustment, direct taxes, Standard Deduction, Gift Tax, dividend distribution tax, higher taxes for the super-rich
Comments:
Nice views. IIB introduction still not introduced inspite of signs of introduction over the last five years.
And if the govt.is less corrupt (Absolute power eventually corrupts!) the citizens will naturally pay higher taxes as in the nordic countries.
Being an economist does not make Author's suggestion of 40% marginal tax
rate for 'super rich' rational. We had seen in our life time marginal
tax rate in excess of 70%, impounding of annual salary increases and
such populistic and 'baying for blood' measures. The result is the
wealth in the Swiss and other nations' banks. If the Government is
sincere it should do something about all pervading corruption. This
nation then will need no taxes.
Rather than increasing taxes increasing tax base is correct solution. One way is to impose tax on agricultural income. States will then depend less on central government.
Another aspect to be considered is that Government should also provide better services to honest taxpayers and general public.
This is a typical socialist psedoeconomic thought process at work. Increasing taxes will
lead to flight of capital through hawala, black real estate holdings in benami and a
massive flight to gold.
It will burst the Rupee to 90 to the dollar. And with flight of capital we will have 3 %
GDP growth. Tankd Sensex and negative job growth. Fat lot of good 2000 crores in
extra taxes will do in this disaster zone economic situation.
Havent these pseudoeconomists learnt from the 70s 80s and last few years where
every teenager also knows better.
Super rich are clever enough to avoid all taxes. Rest of the country will have to bear
the repercussions
Suggestions on Inflation Indexed Bonds are welcome. The suggestion on removing the exemptions is really frightening. There is concern about rich people or capital moving out of the country. But I don’t read about the plight of the young Indian graduating from a decent college to find the cost of a house, Child's education fees, and healthcare prohibitively expensive. The government should not make survival so difficult so that the bright young brains see no point in staying home.
How well said by Mr Raja and Ravi. It's not the time we raise Direct
Taxes. It's the time the government control the corruption that piles up
Black Money.
India is already one of the heaviest taxed countries in the planet without a social security system. These kind of economists are justify a system or corruption and increased taxation. Service tax is discouragement to private entrepreneurship, this is one of the tax a business pays even if it does not make profit. Notional rent is another fake tax charged by government for house which does not get rent. There is also crappy rules like paying advance tax where one is supposed to be predict their income - for people with irregular income this is a big headache. Advance tax and service tax should be scrapped. There should be a SINGLE POINT tax based on ones fixed income from job. Fixed deposit Interest should be tax deducted at sourced and the remaining should be exempt - this will save paper work. TDS could be a flat 25% for all deposits and rest 75% should be kept by the deposit holder without any further taxes. Dividend distribution tax should be scrapped to avoid double-taxation.
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