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