Bootstrapping ---- Why repeal Excise, sales tax, etc
Proposed administrative procedure - TX.05
Procedures to abolish/reduce excise, sales tax, VAT, service tax, octroi etc and confine to Income tax and Wealth tax
- Govt expenditure and taxes
- Regressive taxes
- Why abolisg octroi?
- Draft of the act to repeal/reduce excise, sales tax etc
Govt expenditure and taxes
To support military, police, courts and prisons, and several other activities needed to maintain the civilization, the citizenry has no option but to impose a tax on incomes of its members citizens, land, buildings, gold, shares etc they own and goods/services they consume.
Now there several ways to meet expenses on military, police etc expeses. So an obvious question comes : which way is better, or worse? i.e. which tax is better or worse?
I will repeat the question: Now there several ways to meet expenses on military, police etc expeses. So an obvious question comes : which way is better, or worse? i.e. which tax is better or worse?
Now given a tax, I analayse following aspect of a tax, and classify the taxes in 3 categories --- flat tax, regressive tax and progressibe tax
In the same way, say GoI needs say Rs 10000cr as taxes. Say various members of the citizenry own properties whose total worth is Rs 10,00,000 cr. Now again, there are three ways to impose taxes ---
- Say some dept of GoI, like military, police etc needs Rs 5000 cr
- Say there are 5 cr individuals in a nation and togather their income is Rs 50000cr.
- Now say the taxes are adujusted in such a way that each person ends up paying 10% of his income. Such a tax is called as FLAT TAX (flat wrt income).
- If the taxes are adujusted in such a way that a person who is earning LESSER income ends up paying more than 10% his income, and person with higher income end up paying LESS than 10% of his income. Such a tax is called as REGRESSIVE TAX (regressive wrt income).
- If the taxes are adujusted in such a way that a person who is earning MORE income ends up paying more than 10% his income, and person with higher income end up paying LESS than 10% of his income. Such a tax is called as PROGRESSIVE TAX (progressive tax wrt income).
It is my assertion that regressive taxes are bad and ONLY the flat taxes are good. . Today, India is full of leaders and intellectuals who pretend that they favor progressive taxes, but in reality, they support, implement and shamelessly rationalize/justify regressive taxes.
- One way is to impose a uniform tax of 1% of the property value. This would be a FLAT tax (flat wrt wealth owned).
- Another way is to impose a tax in which those with lesser property will end up paying taxes which is higher % of their property value. This would be a REGRESSIVE tax (regressive wrt wealth)
- Another way is to impose a tax in which those with higher property will end up paying taxes which are higher wrt their properties' values. This would be a PROGRESSIVE tax (progressive wrt wealth)
Following are some REAL examples of regressive taxes, as implemented by GoI
- Taxes on tea : Consider 100cr citizens of India. Say some 60cr citizens drink tea. For the time being, ignore the remaining 40cr. Now I would divide these 60 cr tea addicts into 3 groups :
Now say a cup of tea is costing Rs 5, which uses say 10gm of tea which costs say Rs 2. Say the taxes on tea are 50% of the costs i.e. a cup of tea costing Rs 5 has taxes of Rs 1. Now consider a person making Rs 100/day. Say he drinks 2 cups of tea. Hence he is paying Rs 2 as taxes i.e. 2% of his income. Now consider a person who is earning 10 times i.e. Rs 1000 per day. Obviously, such a person will NOT be drinking 10 cups of tea per day. Say he is drinking 5 cups of tea per day, in which case he will be paying Rs 5 as taxes i.e. 0.5% of his income as taxes. And likewise, a person who is earning Rs 10000/day will be perhaps spend say 0.05% as tea tax. IOW, tax on tea is REGRESSIVE wrt income of a person.
- those who earn below Rs 100/day
- those who earn Rs 100/day to Rs 1000/day
- those who earn above Rs 1000/day
- Taxes on tobbaco, coffee, gutaka, beer and ALL basic commodities which are consumed by rank and file of citizenry : Consider tax on any such commodity, such as tobacco. Once again, say out 100cr citizens of India, say 40cr chew/smoke toboacco. I would divide the tobocco addicts into 3 groups
Consider a person who is earning making Rs 100/day. Say he is chewing 10gm of tobacco on which tax is Rs 1. Obviosuly, those who earn 10 times i.e. Rs 1000/day are NOT likely to consume 10 times more tobacco. Perhaps they would be consuming 2-3 times more. Hence the individuals with lesser income are paying larger portion of their incomes on tobacco taxes. Hence taxes on all these commodities like coffee, tobacoo etc are REGRESSIVE wrt income.
- those who make below Rs 100/day
- those who make beltween Rs 100/day and Rs 1000/day, and
- those who make above Rs 1000/day.
- Taxes on car : The portion of excise, sales tax and other taxes, that is spent on highways, city roads, streets etc is NOT tax towards military, police etc, but a user charge which becomes necessary as tolls cant be implemented for streets and small roads. But consider the portion of excise, sales tax and other taxes on vehicles which are used for sectors other than roads. This portion is a indeed a tax, and it is a regressive tax. But it is LESS regressive than tax on tea, tobocco etc as
Nevertheless, the taxes on vehicles, unless used strictly for road etc, tax is a regressive tax wrt income, and should be stopped.
- A person with less income is unlikely to buy a vehicle and hence this tax will NOT fall on him
- A person with higher income is more likely to buy a more expensive car and hence pay a higher tax.
- Tax on movie tickets : Say a person earning Rs 3000/mo sees say 3 movies a month. Say he buys cheaper tix worth Rs 50, in which tax in Rs 20. So he pays (3 * Rs 20) = Rs 60/month as tax, which is 2% of his income. Now consider a person earning say Rs 30,000/mo. It is unlikely that he would be seeing 10 movies a month. Say he sees 4 movies a month, buy more expensive tix worth Rs 100, in which tax is Rs 40, and thus pays Rs 160/month as tax. The tax % will be = 160/30000*100% = 16/30 = 0.54%. Hence tax on movie tix is a regressive tax, regressive wrt income. What is worse is that in some cities of India like Ahmedabad, the tax on ORDINARY cinemas, where base price is Rs 3 to Rs 25 is about 50% to 80% of the base price. While for the expensive theatres (called Multiplex) where base price is Rs 100/- or even Rs 150/-), the tax is literally ZERO !!! IOW, a person who can barely afford/spend to Rs 10 to Rs 40 ends on movie ends up paying a tax of Rs 5 to Rs. 15. While those spending Rs 100 to Rs 150 pay ZERO tax !!! This is truely a regressive tax wrt income.
Why abolish excise, VAT, sales tax and service tax
Any tax, levied on a commodity will basically be regressive wrt income and wealth. In certain range it may seem progressive. eg an excise on car will be progressive to certain extent as lower income will NOT be buying the car and hence this excise creates zero burden on them. But after certain income range, the tax is regressive wrt income. Also, the burden falls less on upper class, and more on upper middle class. So it reduces surplus capital of upper middle class individuals, and retards them from building large institutions. Hence the domains of products and services, which need large establishment and capital, becomes oligopoly of upper class individuals, who then due to oligopoly, are able to charge higher prices. In long run, this reduces the supply side, and acts against the lower class individuals as well.
I will eloberate the above phenomenon using an example. Consider doctors, who are in upper middle class. Say a doctor earns Rs 200000/- to Rs 400,000/- a year. Now say he buys a car worth Rs 500,000/- and pays excise of Rs 100,000. The car will last for say 5 years, and so the tax paid should be amortized over 5 years. Hence it is Rs 20,000 or say 5% to 10% of his income. Now consider a hospital owner, who earns Rs 10,00,00 to Rs 50,00,000 a year. Even if he buys a car thricw as expensive, the tax paid is LOWER % of his income.
So what is the net effect? The capital accumulation with doctor will reduce, and that with hospital owner will increase. Hence, it would take longer duration for him to establish a clinic, and compete against the hospital owner. This will only increase the oligopoliness of the upper class individuals.
So even when taxes like excise, sales tax etc on EXPENSIVE items are less regressive, they favor the upper class individuals (top 1%) more than they favor upper middle class (top 2% to 10%). The effect is that it takes longer time for upper middle class individuals to form capital needed to create establishments needed to compete against existing establishments owned by upper class individuals.
So here too, a flat income/wealth tax is superior than excise tax on expensive items.
Therefore, my proposal is to REMOVE (or reduce) ALL taxes except flat income/wealth tax.
Why abolish octroi?
Of all the regressive taxes like excise, sales tax, VAT etc, the MOST horrible tax is octroi. It literraly divides a nation into islands and worse, it creates wide oppurtunity for bribery and evasion.
Octroi must be repealed as soon as possible, and replaced by a wealth tax.
Draft of the act to repeal excise, sales tax etc
The procedre TX.04, will be sufficient to gradually reduce regressive taxes like excise, sales tax, service tax, VAT etc. To know the procedure TX.04, please click here.
If you have any other question, please mail it to MehtaRahulC@yahoo.com. Thousand thanks in advance.
Next - TX.06 : Replacing stamp duty by annual wealth tax