Taxing the rich and other fantasies
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There is noise (all puns intended) in the air about the fairness of the Indian personal tax system. And considerable appeals to morality and "sacrifice" and the Indian way about the need to tax the rich in India at a higher rate. Except for a surcharge of 3 per cent on the top tax bracket, the tax rates in India have stayed constant at 10, 20 and 30 percent for increasing income slabs — constant since P. Chidambaram's tax reform of 1997.
For the next budget 2013-14, there appears to be a welcome dedication to bring down the fiscal deficit by at least 0.5 percentage points from the present level of 5.3 per cent of GDP. As is well known, the laudable goal of fiscal deficit reduction can be brought about by either reducing the share of expenditures in GDP, or increasing the share of taxes. This dilemma and choice is quite obvious in the recent fiscal cliff debate in the US. Indeed, the concentration seems to be much more on reducing the share of expenditures. The debate on the personal income tax increase, recommended and/or being discussed, has to be seen in this context, that is, yes the fiscal deficit must be reduced, but it does not follow at all that any tax need be raised. Unless there is evidence in the context of fairness, or morality, or efficiency to do so, emotive appeals to "sacrifice" should be dispensed with.
As discussed in my previous article, 'Blinded by tax revenue' (IE, January 12), the only data source that we have on personal income tax revenue (Standing Committee on Finance, The Direct Taxes Code Bill 2010, March 2012) is inconsistent in the information contained for different income categories. For example, the top income category, those earning more than Rs 20 lakh, shows four lakh taxpayers paying an aggregate income tax of Rs 93,000 crore. This has an implied average tax per person of Rs 23.25 lakh. These "official" numbers also imply that the top 1.3 per cent of taxpayers accounted for 63 per cent of total personal income tax revenue (hereafter tax revenue) — and paid an effective tax rate of 52 per cent, well above the statutory maximum tax rate of 30 per cent.