Tax Freedom Day

PARTH J SHAH
Times of India Apr 19, 2001
If we were to go by Kautilya's techiings, it is probably time we demanded a refund of the taxes paid, says Parth J Shah.

Nothing in life is more certain than death and taxes. Death, however, comes once, taxes very year. How many days of the year does an average citizen work to pay for government expenditures? When does he become free from being a slave to the government? Tax Freedom Day (TFD) is the day you stop working for the government and start working for yourself. It refers to the number of days one has to work to pay off the taxes. During the years 1980 to 2000, it has varied between 65 days (1980) to 80 days (1987). In other words, people had to work from January 1 to March 5 (1980) and to March 20 (1987). The Tax Freedom Day for the year 2000 was March 14 (74 days).

The government collected Rs 292 per person as tax (that is, per child, man, and woman) in 1980 and Rs 3,217 in 2000 (in current prices). Tax take includes all direct and indirect taxes at all levels of government (Centre, state, and local).

Indirect taxes constitute a greater proportion of government revenue, though the share of direct taxes has been increasing over the years. Tax on income is the most important direct tax. Income tax was first introduced in 1860, a reminder from Queen Victoria that India had been transferred to the Crown from the East India Company. The 1860 Income Tax Act expired in 1865, and the next Act was not introduced for twenty-one years. The Income Tax Act of 1886 exempted agricultural income, a practice that we still follow. The current Income Tax Act is of 1961 vintage.

The government can spend more than the taxes it collects. It can borrow or print money to finance expenditures above tax revenues. In 2000, for example, central, state and local governments collected Rs 3,217 per head in taxes but spent Rs 5,965 per person. The government spent 54 per cent more than its revenues. In 1986, the tax take was 22 per cent of Net National Income, but government expenditures were 44 per cent; it spent twice the amount of tax revenue. The difference is made up primarily by borrowing or printing money. But the costs of government borrowing and printing is finally borne by the people, just as taxes. The government debt is ultimately paid by taxpayers. The cost of printing money falls on all citizens. The new money printed to finance government spending leads to an increase in prices of goods and services. The rise in prices lowers the purchasing power of money that people possess. People would be able to buy lesser quantity of goods and services than they would have at the old, lower prices. This is known as inflation tax. It is an indirect tax where the government increases its spending not by taking money from the people (either as tax or by borrowing), but by lowering the purchasing power of money that people hold. By borrowing and printing money, government can spend more than the current tax revenue.

A fuller picture of government burden on the citizenry should focus on total government expenditures. Central, state, and local governments spent Rs 558 per person in 1980 and Rs 5,965 per person in 2000. To pay off the government expenditure burden, a person would have to work 125 days (or up to May 3 from January 1) in 1980 and 137 days (or up to May 16) in 2000. An average citizen worked for four and half months to pay for government expenditures in 2000.

During 1980-2000, the earliest Freedom from Government Day (FGD) was May 3 in 1996 and the longest was June 8 in 1986. The two extreme years are 1986 and 1996, a coincidence that highlights the governing philosophy of those two decades. The years 1985 to 1992 have been the most profligate — the high tax and spend years.

For 2000, the Tax Freedom Day for USA is May 3 and for Canada June 29. Compared to these, India's TFD of March 14 seems like a tax heaven. But this hides the fact that the link between tax revenue and government expenditures is tighter there. In India non-tax revenues constitute a sizeable proportion of the overall loot. The total government expenditures therefore give a more realistic picture of the cost of government in India. And the Freedom from Government Day is May 16, a date right in the middle of USA, an apparently laissez faire state, and Canada, a welfare state. We haven't yet abandoned the middle ground; Narasimha Rao can sleep easy. (For more information on US and Canada, check www.taxfoundation.org and www.fraserinstitute.ca And have fun at taxslaverysucks.org.)

Kautilya's Arthasastra , which in my opinion is a work on public finance and public administration, and not really on economics, regards revenue and taxes as the earning of the sovereign for the services rendered by him to the people, offering protection and maintaining law and order. The relationship between the king and his subjects is based on dharma, and it is the king's sacred duty to protect his subjects in exchange for tax revenues. And if the king failed in his duty, says Kautilya, the subjects had a right to stop paying taxes, and even to demand refund of the taxes paid.

What services we citizens get in exchange for our taxes to the government? Isn't it time to demand a refund?

New Delhi, April 19, 2001
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