Do we need radical tax reform? Is our polity capable of implementing such reforms?
For a couple of weeks now, there has been some noise about a radical plan to change India’s taxation system by abolishing all existing taxes and substituting them with a banking transaction tax. This idea, which has been on the fringes for almost a decade, has suddenly got some traction from the BJP. Reactions to this concept have been crowded at two extremes. While some people claim that it would the greatest thing that could ever happen, others dismiss it out of hand as a crackpot idea.
It could be either, it doesn’t matter. What matters is what drives the widespread urge that the tax system is so broken that some very fundamental change is required. The feature of this bank tax system that appeals to most people is not that taxes would be abolished — I think everyone realises that it would be a fairly high-tax system, but it’s ‘automatic’, paper-work free nature. That’s the real selling point — no tax returns, ever. Honest taxpayers — especially those who run small businesses — are effectively saying that they would be actually willing to pay more tax, provided they don’t have to deal with the tax system!
Even though there’s little practical chance that this kind of radical change would ever be brought about, there’s room for realistic yet revolutionary changes that could be brought about. In a well-argued blog post economist Ajay Shah puts forward the case of a radical tax reform of a different kind. He argues that all taxes except personal income tax and the new Goods and Services Tax (GST) should be abolished, at the same time, income tax should be spread across at lower rates across a larger section of the populace.
While Shah’s logic is certainly persuasive, it’s not easy to visualise a political dispensation which could abolish corporation tax while expanding personal income tax. Recent events show that sections of the Indian electorate are readily capable of leftward lurches and sensible tax reforms will be hard to achieve.