Taxing the rich and other fantasies

If you believe these numbers, then there are several used bridges and cars you can buy. But you certainly cannot, and should not, be arguing for a tax rate hike, or a surcharge, on these super-rich 1 per cent. These worthy individuals are already paying for a higher fraction of tax revenue than any other country in the world, developed or developing. The second highest sock-it-to-the-rich country is the US, with the top 1 per cent paying "only" 37 per cent of tax revenue — most countries the percentage is less than 30 per cent. Note that the top 10 per cent of taxpayers have a share of 27 per cent in Sweden and 31 per cent in Germany.

If the "official" figures cannot be believed, then how should armchair experts analyse the situation? (The chair experts in the bureaucracy have all the data and presumably know when the data are reliable or not — one hopes!) Examination of aggregate known data can help in the analysis. The table shows some known data and some implied estimates. The latter are obtained from a synthetic income distribution constructed for 2002 on the basis of the tax returns, average income etc, contained in the Kelkar committee report on direct taxes, 2002. The distribution was so constructed to match the total tax collected from the income categories and the number of tax returns filed, as presented in the Kelkar report.

The data show that to a surprisingly large extent, the tax system in place has delivered. Between 2002 and 2011, income per worker has gone up by 221 per cent, the income subject to tax has increased by a much larger 350 per cent, and the realised tax revenue has increased by a whopping 795 per cent. And the average tax compliance rate has doubled from 16.1 per cent in 2002 to 31.2 per cent in 2011-12. The definition of compliance here includes both the compliance in terms of the number of people who should be filing tax returns and are filing tax returns, and compliance in terms of income declared.

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