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Taxation and how India (or any) govt. should spend

January 6, 2013

Total annual expenditure by all governments in India = ~ INR 25 lakh crores.

India’s population = ~125 crores

So, annual govt expenditure per capita = 20,000 INR!! This includes everyone from new born babies to very old people and very poor to ultra rich. For a family size of 5, this means 1 lakh INR per annum!!

Wonder why we still have so much poverty and what’s the best way to reduce it? Read on:

Different ways for govt to spend this money:

  • By way of numerous central schemes and decide what people should get and what not – the way it does now. Horrible corruption, wastage and market distortions. Leads to wealth concentration in the hands of top few % of people. Limited trickle down.
  • Give money to the village or ward level govt. controlled by the local general body. Let them decide what they want to do with the money. This is Arvind Kejriwal’s GREAT IDEA (Swaraj) and key agenda! I think this will solve majority of problems!
  • Give cash directly to individuals. No questions asked. If you can identify the rich, then don’t give them. This is even better than Arvind’s idea! (Note: Congress’s cash transfer program is different since the cash transfer there will be subject to conditions. eg: if you can prove you bought a LPG cylinder, then you will get some cash subsidy. Many of these conditions will be stupid and proving compliance will require bribes. If they can remove these conditions, then this is great!)
  • Finally, the best way to spend this money is NOT TO EARN it!! Let me explain.

Govt. gets money in 3 broad ways:

  • direct and indirect taxes
  • borrowing – also a form of taxation since it increases cost of capital for everyone in the country and requires future generations to pay more taxes
  • money printing – causes inflation which is also a  form of taxation (most people say this is the worst form of taxation though i think this is the most efficient)

So, all money that govt. gets is by taxing the people.

Now, a lot of people wrongly believe that most taxes are paid by the rich people. Well, borrowing and money printing (2nd and 3rd bullets above) equally affect the rich and the poor. Indirect taxes are also paid equally by the rich and the poor.

Direct taxes are PAID more by the rich but the burden of taxation is not on the person paying the taxes. When a business pays taxes, those taxes are borne by the investors, suppliers, employees and customers of the business depending on the elasticity of demand i.e. the bargaining power of each group. A business can pass on some of the taxes to its employees by reducing the no. of people it hires or by reducing salaries. It can pass on some to the customers by increasing the price or reducing the quality of goods. Even when the business takes the hit by way of lower after-tax profit, it reduces spending and investment by the business owners leading to less jobs.

In a nutshell, it is impossible to determine who is contributing how much to the govt. In absolute nos., the rich contribute more but in terms of % of total income or wealth or expenditure or quality of life, the poor contribute more.

So, less taxation means not only less wastage and corruption by govt but also significantly lower prices for goods and services and more employment opportunities for everyone. 

While I prefer the last of the 4 approaches, I atleast hope that our govts. follow more of the 4th, 3rd and 2nd approaches, in that order!

(another big reason for India’s poverty are unnecessary govt regulations and public sector enterprises that promote corruption, wastages and distort the free market)


From → Tax Reforms

  1. you come up with such simple ideas that even an idiot like me who have no knowledge about economics can understand it……. i don’t know what stops of doing the same to the people in power….

    • ha ha….always easy to explain to someone who doesn’t have preset notions 🙂

      I can NEVER convince even a single ‘expert’ on the above or anything else.

  2. harshita permalink

    seems intrestng……
    bt i hope dat govt. follow dis so dat it is easy to undrstnd 4 us too…..

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