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Taxes, legitimacy and the state
By Pratap Bhanu Mehta
The problem is not simply a technical one of designing a better tax administration system; the real challenge is to
redefine the relationship between taxation and citizenship.
IF THE legitimacy of a state is measured by the willing compliance of its citizens with reasonable tax demands placed
upon them, then the Indian state's legitimacy would surely rank low. While our overall tax over GDP collection ratio
of around 15 per cent is not bad in comparative terms, most of this revenue comes in the form of indirect taxes. But
the excessive reliance on indirect taxes is itself a sign of what might be, for want of a better word, called the fiscal
illegitimacy of the Indian state. When a 17th century Swedish aristocrat described indirect taxes as "pleasing to God,
hurtful to no one and not provocative of rebellion", he was onto at least half a truth: indirect taxes, by being invisible,
incite less opposition. But they are also a sign that the state has to resort to subterfuge to collect its revenues.
Much of the debate generated by the Kelkar report focuses on the withdrawal of exemptions and reconstituting of
income slabs. But as the report itself emphasises, tax policy and tax administration are inseparable, the biggest
obstacle to improved collection being tax administration itself. The report itself provides many plausible suggestions
to reform tax administration on many fronts and it is these that deserve greater discussion. Many of these proposals
have been around for quite some time, and even those reforms that have been implemented piecemeal seem to be
yielding few results.
The problem is not simply a technical one of designing a better tax administration system; the real challenge is to
redefine the relationship between taxation and citizenship. If the modern push for freedom came from the slogan "no
taxation without representation", the phenomenon of "representation without taxation" seems to jeopardise the fiscal
well being of the state.
Of course, in a poor country such as India, the number of taxpayers who pay direct taxes will be considerably smaller
than the number of voters, and that is as it should be. Contrary to the fears or hopes of many, this has not led to a
significant redistribution. But the number of people who ought to pay more of the kind of direct taxes of the kind
most of the salaried class pay is considerably greater than the 28 million who currently pay income taxes. These are
the citizens who might in a true sense be described as having representation without taxation. Remove Government
employees and the salaried class in the organised sector, and the number of citizens who have a fiscal stake in the
state becomes abysmally small.
The reasons for the number of citizens paying direct taxes being small are complex: agricultural income has
historically not been taxed, the myopic and exorbitant rates of taxation that prevailed created a culture of evasion that
is now difficult to overcome, the self-defeating rules on financing of political parties created an inordinate demand
for "black money" and the fear of being harassed by the state led most citizens to stay out of its net altogether.
Historically speaking, the tax base of most societies is deepened when there is total mobilisation for war, of the kind
Europe and America experienced in the first half of the 20th century. Indian citizens have not been mobilised in quite
that way; our patriotism has come pretty cheaply for most of us. But we have also reached a point where frankly,
most people do not see any link between their taxes and the services they get from the state. Government employees,
who actually do not get a bad welfare state, see what the Government does for them more as a consequence of their
occupation rather than their taxes, and in any case they have no choice but to pay. But for many of the other wealthy
citizens, there seems to be no connection between what the Government does for them and their possible
contribution to the Government.
One of the unintended fallouts of our sense of the state as corrupt and inefficient is that we do not feel beholden to it
even for the services it does provide.
Corruption of the state has become an excuse for denying our obligations. Even after taking into account all the ways
in which our money is siphoned off and leaked away, the Indian state often manages to do many things for its
citizens; the only trouble is that it never gets the credit for it.
One of the possible consequences of individuals taking recourse to options outside the state for services ranging from
health, education, security etc, is that they will feel even less of a stake in the state. It is undoubtedly true that we
have come to this pass because many thought the services the state provided to be abysmal at worst and inadequate
at best. But we may be reaching a point where despite lowering tax burdens, few feel obliged to comply. This poses a
great challenge for the reform of the political economy of taxation. Somehow the Indian state will have to make the
link between certain services the citizens get and their taxes more apparent. Decentralisation of taxes and services,
where you can actually see where your money is going, rather than to just some anonymous thing called the state is
one option. But unless this link is made clearer we will neither hold the state accountable nor be willing to pay for it.
A small base of direct taxpayers distorts politics in other ways as well. Indirect taxes are often regressive. If the
visible burden of taxes is not widely shared, if all those who can are not paying their share, those who do are more
likely to be resentful of tax revenues going to general services rather than to the class that pays them.
Second, those who can but do not pay for the state ironically care for the state even less in the sense that they truly
come to internalise the view that the state is nothing but a free lunch. The Indian state's biggest dilemma is that half
the time it is thought of as a free lunch, and half the time as a wasteful parasite that simply takes without giving
much. Neither sentiment is wholly appropriate, but both lead to a real wariness about paying the state.
The Kelkar committee proposals for administrative reform are not going to make much headway unless this larger
perception is changed. Mere coercion or sophisticated administration is not going to yield greater tax compliance,
even if rates are reduced as they must be. This is what the thrust of economic reforms ought to be: the state should
deliver more where it can and must, and stay out of those areas where it cannot spend our money well. Until that
obtains, the only certainty that will remain will not be, as Benjamin Franklin suggested, death and taxes, but death
and tax evasion. Ever wondered why there is not enough outrage over corruption or greater demand for better
services by the state. Perhaps it is because many of those who can are not paying for them.
(The writer is Professor of Philosophy and of Law and Governance, JNU.)