A very fundamental question has been lingering in my mind for quite some time now, especially after this demonetization move by the government and RBI - why should there be tax?
I am trying to put forth my point through this post, but please be aware that being technically accurate or complete in coverage and definitions is not the intent here, as I'm sure the relevance of my point is not lost because of that. Please bring forth if this post comes with any obvious or severe misunderstanding of our systems that would make my point meaningless.
I am trying to put forth my point through this post, but please be aware that being technically accurate or complete in coverage and definitions is not the intent here, as I'm sure the relevance of my point is not lost because of that. Please bring forth if this post comes with any obvious or severe misunderstanding of our systems that would make my point meaningless.
The prime rationale for government pushing for a cashless economy is to ensure nobody escapes from paying taxes. All the so called black money became black coz the money went through a transaction that was entitled to certain tax which someone didn't pay, coz the transaction didn't have a record. This may be too simplistic a definition of black money, but let's say it covers some of it.
Technically, Tax is meant for all the government spending, including salaries of all government officials, spend on infrastructure development, all the welfare schemes and incentives, and maintenance of everything the government is responsible for. I am sure there are lots of other areas the money is spent, so let's just be aware of that and move on, without trying to define tax 100%. It is important to add, however, that one of the key goals of tax is income/wealth redistribution - which broadly means making rich less rich and poor less poor.
Now the fun begins. You have tax. And then you have ways to save tax. And the ways are supposed to help government acquire funds indirectly either through reserves of locked-in funds at individual levels or increased business growth at corporate levels and so on, which will lead to win-win for both parties - the government and the tax payer - in the long term. I don't exactly know the rationale behind offering such options to tax-payers, but I guess it must be to create an illusion of saving partially on what one is giving away and thereby to offer the prospects of additional well-being owing to one's extra application of wisdom in managing one's finances.
Now, the issue here is that people are smart. And those who see loopholes take advantage of them if they can manage to amass a little courage, and if the consequences are not that grave vis-a-vis the rewards. Why pay anything at all when you can not pay anything at all? - this question inevitably comes to everyone's mind when there is a way to escape paying taxes. A government would never like such people, and more importantly such practices. Given that people are what they are, one can only curb the practice - by plugging all the loopholes. Cashlessness is one such measure. But it doesn't guarantee that other creative practices won't emerge, coz still - people are what they are. In any case, especially in the Indian context at the moment, going cashless should be driven by convenience and not by lack of options. It's debatable whether convenience can bring a faster transition or brute force. My observation says the latter may be quick but short lived and temporary.
Doing away with the concept of Tax
Why have taxes at all? Suppose the total income of the economy for a year is x. And the government needs t amount to manage its expenses for the year. In the current model, we take away t from x so that x-t is what remains with all the working and tax-paying entities of the economy. Now imagine a model where the t is allocated by the central bank to the government. With the inflationary, money supply and demand-supply adjustments, the income of the economy will have to adjust to x-t. Or may be it won't, let's say it becomes y. The government spends like it does currently, may be budgeting for slightly more than t. This gap, called the fiscal deficit now, will have to be borrowed from the bank, and returned over time through the profits the government makes from the public sector undertakings, auctions of public property and natural resources, etc. The income redistribution part can be taken care of through direct cash disbursal, which comes from the t amount to be spent. I am sure there would be lot of econometrics involved in calibrating these parameters, including the money supply, to make it work efficiently. And I believe it is workable. It will definitely curb tax-evasion, as there is nothing to be evaded. In a way the government has already reserved its part and would be working with it for whatever it has to do. There still is scope for corruption at various levels, but that has to be modeled and dealt with as required. The needless hassle of creating and the resulting behavior of understanding complicated and funny income structures, benefits and investments would end and people will take what they make. And nobody would have any reason not to declare what they have. The entire money will circulate freely. Getting cashless will be convenient and will be embraced without a sales pitch.
The key challenge would be to transition to a new model like this. The world is so used to working with the tax model over centuries that anything else often seems inconceivable. However, I think there is scope for other models, much more simple and logical. The one I proposed has to be thoroughly modeled with all economic and financial considerations, and piloted very well so as to fine tune. And should definitely be rejected if it is not workable.
Does it have a chance? Please do let me know your views on this.
Technically, Tax is meant for all the government spending, including salaries of all government officials, spend on infrastructure development, all the welfare schemes and incentives, and maintenance of everything the government is responsible for. I am sure there are lots of other areas the money is spent, so let's just be aware of that and move on, without trying to define tax 100%. It is important to add, however, that one of the key goals of tax is income/wealth redistribution - which broadly means making rich less rich and poor less poor.
Now the fun begins. You have tax. And then you have ways to save tax. And the ways are supposed to help government acquire funds indirectly either through reserves of locked-in funds at individual levels or increased business growth at corporate levels and so on, which will lead to win-win for both parties - the government and the tax payer - in the long term. I don't exactly know the rationale behind offering such options to tax-payers, but I guess it must be to create an illusion of saving partially on what one is giving away and thereby to offer the prospects of additional well-being owing to one's extra application of wisdom in managing one's finances.
Now, the issue here is that people are smart. And those who see loopholes take advantage of them if they can manage to amass a little courage, and if the consequences are not that grave vis-a-vis the rewards. Why pay anything at all when you can not pay anything at all? - this question inevitably comes to everyone's mind when there is a way to escape paying taxes. A government would never like such people, and more importantly such practices. Given that people are what they are, one can only curb the practice - by plugging all the loopholes. Cashlessness is one such measure. But it doesn't guarantee that other creative practices won't emerge, coz still - people are what they are. In any case, especially in the Indian context at the moment, going cashless should be driven by convenience and not by lack of options. It's debatable whether convenience can bring a faster transition or brute force. My observation says the latter may be quick but short lived and temporary.
Doing away with the concept of Tax
Why have taxes at all? Suppose the total income of the economy for a year is x. And the government needs t amount to manage its expenses for the year. In the current model, we take away t from x so that x-t is what remains with all the working and tax-paying entities of the economy. Now imagine a model where the t is allocated by the central bank to the government. With the inflationary, money supply and demand-supply adjustments, the income of the economy will have to adjust to x-t. Or may be it won't, let's say it becomes y. The government spends like it does currently, may be budgeting for slightly more than t. This gap, called the fiscal deficit now, will have to be borrowed from the bank, and returned over time through the profits the government makes from the public sector undertakings, auctions of public property and natural resources, etc. The income redistribution part can be taken care of through direct cash disbursal, which comes from the t amount to be spent. I am sure there would be lot of econometrics involved in calibrating these parameters, including the money supply, to make it work efficiently. And I believe it is workable. It will definitely curb tax-evasion, as there is nothing to be evaded. In a way the government has already reserved its part and would be working with it for whatever it has to do. There still is scope for corruption at various levels, but that has to be modeled and dealt with as required. The needless hassle of creating and the resulting behavior of understanding complicated and funny income structures, benefits and investments would end and people will take what they make. And nobody would have any reason not to declare what they have. The entire money will circulate freely. Getting cashless will be convenient and will be embraced without a sales pitch.
The key challenge would be to transition to a new model like this. The world is so used to working with the tax model over centuries that anything else often seems inconceivable. However, I think there is scope for other models, much more simple and logical. The one I proposed has to be thoroughly modeled with all economic and financial considerations, and piloted very well so as to fine tune. And should definitely be rejected if it is not workable.
Does it have a chance? Please do let me know your views on this.
