Wednesday, 19 September 2012

47% vs 97%

Mitt Romney is in a  soup over his 47% remark. In some remarks he made at a private meeting he said that 47% of Americans do not pay income tax (fact) and implied that these were scroungers (rubbish). But he was factually accurate in that 47% of Americans do indeed not pay income tax - although to be fair about that half of that lot do pay payroll taxes which is a form of income tax meant for funding social security and Medicare.

The purpose of this post is not to wade into the political controversy. But simply to point out the fact that if Romney were in India, he would say 97% of the population does not pay income tax. That's right - only 2.8% of Indians pay any income tax .

That's not to say 97% of the population does not pay any tax at all. Indirect taxes like VAT, Sales Tax, Octroi and a whole host of devilish taxes are levied on everything. Even a beggar buying beedis is paying all these taxes. But income tax, the largest revenue earning component of the budget is paid by only 2.8% of Indians.

Of course, this is a headline grabbing statistic that somewhat obscures the facts. India is a young country with a large number of children. They obviously are not meant to pay taxes (although I am somewhat loath to mention this as Ramamritham might pounce on the idea and design a tax for them). But clearly there is something very wrong in the Indian taxation system.

Surely so much of India is not dirt poor. The fact is that lots of people dodge taxes. Perhaps the true number of those who should be paying taxes is three times this number. Still, even if you say by rigorous enforcement of the law the number of tax payers would rise to say 9% - three times the current number, even then this is awfully small. How can a country which wants freebies and subsidies for everybody be financed largely by just 10% of its population.

Three things are blindingly obvious

- Economic growth for everybody should be the single most important priority of the government and society ; millions must be given the opportunity to earn enough income that they pay taxes. If ever there was a case for learning from the China model, this is it. Get rich first; then worry about income distribution.
- Tax evasion is clearly rampant. Here Ramamritham is indeed trying hard, but the scale of the problem beggars belief
- Tax exemption for agricultural income and long term capital gains has to go. If you earn sufficient income, whatever the source may be, you have to pay income tax.

You can only soak the 3% so much.

12 comments:

  1. Nice to know I am in a special category of 3% at least until last year ;)
    btw with my time honored tradition here we go with a link ;)

    http://www.forbes.com/sites/victorlipman/2012/09/18/strange-bedfellows-what-mitt-romney-and-kate-middleton-have-in-common/

    p.s
    Full Disclosure: I have not seen Katie's pic! (yet)

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  2. Hey, I wonder if tax evasion in Greece is even worse than India's?

    Anyway, it appears that thanks to Mamata's heart that bleeds for the poor and the downtrodden, you might get to elect a new government real soon ;)

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  3. If just 3% pay Income Tax what is the share of Personal Income Tax to all tax collection (IT, Corporate Tax, Excise, Customs, blah) Will it make any difference if you abolish personal income tax? I presume we can scale down the bureaucracy that is involved in the collection of income tax. Personal Income tax - it's not worth it.

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  4. only if intent of rulers of Ramamritham is such. Infact, rulers want these Ramamritham to be around without whom rulers can't rule.

    Read in a piece yesterday that political parties wants poor to be poor so that vote bank politics never ceases to exist. On a macro level, all these larger issues seem inter related.

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  5. That's a stark statistic! Like TMM I was also wondering how much money can be raised from 3% and yet you mention that it is the largest component of revenue in the budget. How does that work out?

    The issue of taxing agricultural income is an old one but somehow it is seen as politically unviable. But I would think that the poor farmers (votebank) are unlikely to attract any income tax so they should not be affected. Then what is the catch? Who are these large influential farmers? Or is it something that is viewed as hard to implement - the taxes on agri income?

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  6. Really? But how on earth can a country sustain itself if only such a small proportion pay income tax? I am astounded! Call me naive but surely it should be high up on a government's agenda to make all those who earn cough up the requisite percentage? Social conscience is something which is sadly missing not only in India but all over..for no-one with a social conscience should be evading taxes, don't you think?
    Suja

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  7. Don't know what happened to my earlier responses. They simply disappeared !!! Responding again anyway

    @Filipino - You are in the very special 0.1% my friend :)

    @Sriram - Not even Greece evades taxes like India. The only reason why it hasn't been such a disaster for India is that India is growing while Greece is contracting.

    No no, the government won't fall. No politician wants elections - its become simply too expensive for them. Rs 500 plus a bottle of liqour for each vote and you can do the math !!

    @kiwi - No we can't Personal income tax is now more than either excise or customs - What a change from 20 years ago, eh). It contributes some 20% of Gross Revenues. Together with company income tax it accounts for more than half of the revenues. So I'm afraid we lot have to pay our taxes !

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  8. @J - My hypothesis is that the GDP of India is twice what is reported (maybe even more) because of the massive black money and tax evasion). Take China - one of the largest sectors is property. So must it be in India. And yet there is not a single property transaction that happens without a suitcase exchanging hands. So actually personal taxes as a % of GDP is much smaller, reflecting the measly 3% who pay.

    Agricultural income tax is more a political issue than an implementation one. In reality, the same rules that impact doctors, lawyers and such other professions can also be extended to agriculturists. The problem is political will.

    @Suja - Its a huge problem Suja. The problem is that value systems have completely eroded. All this noise about corruption - and yet everybody, when he buys or sells a house, exchanges suitcases of cash and under reports the value and thinks it is perfectly OK to do so. Tax evasion is massive - even the 3% who pay, I am willing to bet that not even one declares his full income. India is fast degenerating into a kleptocracy. The problem hasn't blown us up simply because we are a young population and economically growing.

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  9. @Vishal - Unfortunately, so true.

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  10. ?? thot i had posted a comment here ipo kaanum??

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  11. Sandhya Sriram25/9/12

    India is in a peculiar situation now. Many countries have budget deficits. but coupled current account surplus. India has drifted to a twin deficit situation with a budget deficit and a current account deficit.

    if there isnt a way by which the parallel "Black" economy is busted or atleast a significant portion unearthed, there is no way, this can sustain. measures like GAAR in that respect were a positive thought. but with lack of mature execution, it could turn out to be a greater pain to the person who complies and no impact for some one who doesnt.

    But then, the real economic progress is not about where the Government gets money from, but where it puts it back in, to create a virtuous reaction. many measures that economists love to rattle out, need to pick up pace. The recent confidence shown in taking some steps can end up being a temporary blip, if the coalition dynamics vote otherwise, and hence we have to wait and watch where this gets to.

    i have gone completely astray blabbering all through and hence stop here.

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  12. @gilsu- Yeah - something happened. Even my response disappeared. I remember seeing your comment and then don't know what happened ...

    @Sandhya - Very very true. Our deficit situation is indeed perilous. It was the threat of an imminent credit downgrade to junk bond status that prompted the latest round of reforms. Somehow we never seem to act except in a crisis.

    Absolutely true that its also a matter of where we spend. In this our track record is a sorry one. As a race we are kleptocrats. Imagine how everybody is arguing for subsidised LPG - why on earth should the middle class, who are the users of LPG be subsidised even 1 paise.

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