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 Tax Freedom
 
We need something better than soak-the-rich taxation
Daily News And Analysis, India Sunday, September 05, 2010


The idea of expanding the scope of wealth tax always appeals to jholawallas and the unimaginative Left, because it sounds redistributive in nature. It won't achieve anthing good. The rich should soak themselves by doing charity work rather than allowing the government to do it for them. Wealth in private hands usually does more good that the same wealth in government hands, writes R Jagannathan in Daily news And Analysis.

Pranab-da’s direct taxes code (DTC), which kicks in a new tax regime from 2012-13, is a semi-washout. For one, it is not as radical as it was originally intended to be by raising tax thresholds and eliminating tax-breaks. When a tax regime is complicated, it distorts saving and spending patterns and encourages corruption.

...

The idea of expanding the scope of wealth tax always appeals to jholawallas and the unimaginative Left, because it sounds redistributive in nature. There will always be a broad political consensus on soak-the-rich taxes. Populism goes down well on the election trail. It won’t, of course, achieve anything because wealth will suddenly start going underground. Phony trusts and non-profits will sprout to redistribute the wealth holdings so that taxes can be minimised.

...

I am on the side of both the soak-the-rich crowd and the man trying to protect his riches. But I would like the rich to soak themselves by doing charity work rather than allowing the government to do it for them. Wealth in private hands usually does more good that the same wealth in government hands.

...

There has to be a better way to redistribute wealth. Let me throw a simple idea here. Ask yourself: why do we collect taxes? Presumably, it is the price we pay for governance, including redirecting resources towards the needy. Governance happens when the cost of administration is kept to a minimum, and the bulk of the resources are funnelled to the poor.

The reality, though, is that the bulk of the taxes go to feed the bureaucracy and keep politicians in power. Politicians soak the rich in the name of the poor, but in our kleptocracy, some of the money comes back to the rich through corruption and kickbacks. The poor fall through the cracks.

So, here’s the idea. Let the government legislate a tax regime where any rich person contributing 1% (or even 1.25%) of his wealth directly to a bonafide charity or official schemes of the government is exempt from wealth tax. T

...

I see two advantages in this. One, society’s actual needs will be catered to with a sense of accountability. Two, those with a conscience may actually contribute more when they see their money directly helping the poor. Wiping the tears of the downtrodden and helping them build marketable skills is more beneficial for the country than running Mother Teresa schemes - which romanticise charity instead of investing in capacity-building.

...

But what matters to the poor is what reaches them at the end of the pipeline. There is no need for the babu to play middleman and raise the cost of service delivery when the money can be routed directly to social sector schemes. More important than the tax-GDP ratio is the welfare-to-wealth ratio, which is the amount of public and private money spent on social security, education and health as a proportion of national wealth. Maybe our jholawallas can work on ways to measure this ratio rather than merely focusing on hatred of the rich.

A good place to begin is by offering this direct charity contribution option as an alternative to wealth tax. If it works, society benefits. If it doesn’t, wealth tax can return. No one loses.

 

This article was published in the Daily News And Analysis on Sunday, September 05, 2010. Please read the original article here.
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