Column: What is to be done?

Jan 20 2014, 04:02 IST
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SummaryFor any new government, the priority should be reducing the national debt by strategically privatising PSUs

There seems to be, at long last, some discussion of economic issues in the campaign for the forthcoming general elections. First, there was the balloon floated about the BJP’s intention to abolish all taxes and replace them with a transaction tax. Then, there was the sudden announcement by the new Delhi government to reverse the decision by its predecessor to welcome the FDI in multi-brand retail business. Indeed, each of the three decisions made by the new AAP-government—water subsidy, power subsidy and the audit of the power discom accounts have also roused a debate. There has been much unease about these decisions as well as about some possible copycat moves by other states, such as Maharashtra’s on power subsidy.

At the very least, the budgetary process has to be improved. In the UK, every budget is analysed in terms of the gains and losses of each decile of income-earners. That tells us whether the latest tax and benefit changes are progressive or not. India needs a similar discipline in its budgetary process. Indeed, each such decision as the Delhi government’s decision to subsidise water ought to show how it is going to be paid for. Often the debate is about huge hidden subsidies that the corporate sector gets. Let us have a statement of both taxes uncollected and subsidies paid along with information on how each subsidy is paid for.

The tax abolition decision has come without any pedigree. India has no tradition of any serious libertarian thinking, no anti-tax political movement since independence. There was a high income tax rate culture during the glorious socialist years where Congress could not have enough of income and wealth taxes at prohibitively high rates. Now, at least the income tax rates have come down. The wide spread and persistent growth of black money is a proof of the adverse incentive effects of taxation.

The idea of abolition of all taxes may find no owners but the idea of simplifying the administration of taxes and reducing the transaction costs (in terms of time and money spent) of tax compliance would be welcome. If taxes have to be reduced or abolished, there has to be a careful testing of the alternative tax proposed. The transaction tax, as currently proposed, may lead to a growth in the cash economy which we should not encourage.

There is some discussion of bringing back black money from abroad. This may

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