FOR A

Tehelka - - ECONOMIC REFORMS -

coun­try to have a steady growth rate, for it to be­come pros­per­ous, for this pros­per­ity to be widely dis­sem­i­nated, it needs a pre­dictable, non-ra­pa­cious tax sys­tem. Kau­tilya would have agreed with this sen­ti­ment. To­dar Mal would have em­phat­i­cally en­dorsed this view. All prac­ti­tion­ers of the 19th cen­tury dis­ci­pline of Pub­lic Fi­nance (now un­for­tu­nately sub­sumed by the va­porous non-dis­ci­pline of Macro­eco­nomics) would have un­der­stood the im­por­tance of a sen­si­ble tax sys­tem. The first maxim in clas­sic Pub­lic Fi­nance was that “the goose that lays the golden egg must not be killed — it should be en­cour­aged to lay more golden eggs”. Sim­ply speak­ing, there can­not be any tax rev­enues for the sov­er­eign un­less there is wealth be­ing cre­ated by cit­i­zens. There­fore, the first con­di­tion is to have an en­vi­ron­ment where peo­ple en­gage in pro­duc­tive ac­tiv­i­ties and cre­ate wealth. Ra­pa­cious tax­a­tion takes away the in­cen­tive for le­git­i­mate wealth cre­ation. In the old days, if a king in­creased taxes too much, law-abid­ing peas­ants and mer­chants sim­ply mi­grated to the next king­dom. This hap­pens even to­day. High tax rates en­cour­age tal­ented peo­ple to seek their for­tunes else­where, in en­vi­ron­ments where they can keep a larger share of their in­come and not have the wealth they cre­ate ex­pro­pri­ated by ru­inous taxes.

The other prin­ci­ple of tax­a­tion that Kau­tilya would have ap­proved of is “pre­dictabil­ity”. If a monarch de­cides to sud­denly im­pose fresh taxes on ac­tiv­i­ties that were ear­lier un­taxed or to in­crease tax rates ar­bi­trar­ily, even whim­si­cally, it is a sig­nal to cit­i­zens that the sov­er­eign con­cerned is “mad”. To live in the king­dom of an in­sane ruler is to sub­mit one­self to the caprices of a lu­natic. One more re­cur­ring is­sue with re­spect to tax­a­tion is the role of the tax col­lec­tor. His­tory is re­plete with in­stances of cruel tax col­lec­tors driv­ing cit­i­zens to re­bel­lion. The Evan­ge­lists who wrote the four Gospels of the New Tes­ta­ment of the Bi­ble make it quite clear that the or­di­nary peo­ple of Judea hated the tax col­lec­tors of the Ro­man em­pire. Tax col­lec­tors, more of­ten than not, ex­ceed the in­struc­tions of the sov­er­eign and are fre­quently known to alien­ate whole pop­u­la­tions. That is why the great em­peror Ak­bar was con­cerned that his tax col­lec­tors, un­der To­dar Mal’s su­per­vi­sion, be­have in a hu­mane man­ner.

Most econ­o­mist agree that one of the rea­sons In­dia has not been able to im­i­tate East Asian coun­tries and­pros­per has been the dys­func­tional tax regime. Our tax sys­tem and tax ad­min­is­tra­tion in­her­ited du­bi­ous lega­cies to start with, and in­stead of mak­ing it more ra­tio­nal and sen­si­ble, we have pro­gres­sively made them worse. To­day, it has be­come an al­ba­tross that is stran­gling our econ­omy.

The in­sid­i­ous legacy we in­her­ited from our erst­while British im­pe­rial masters was an ex­ces­sive re­liance on in­di­rect taxes. As any econ­o­mist will tell

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