Time to Bring Tax into 21 st

Century
Anuj Shukla
Anupriya
Aparna Das
Aparna Vishnubhatla

Contemporary Business Environment 11 November 2018

Topics Covered
• Introduction
• Origin and Evolution
• Why does government generate taxes?
• Rates & impact on economy
• Taxation in India
• India vs other countries
• Plucking the feathers
• Defects (Indian Tax System)
• The 3 Flaws
• The way forward
• Possible impacts of progressive system

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Introduction
• A Tax (from the Latin taxo) is a mandatory financial charge or some
other type imposed upon a taxpayer (an individual or other legal
entity) by a governmental organization in order to fund various public
expenditures.
• A failure to pay, along with evasion of or resistance to taxation, is
punishable by law.
• Most countries have a tax system in place to pay for
public/common/agreed national needs and government functions.

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Origin of Tax
• The word ‘tax’ first appeared in the English language only in the 14th
century.
• Before that, English used the related word ‘task’, derived from Old
French. For a while, ‘task’ and ‘tax’ were both in common use, the
first requiring labour, the second money.
• ‘Tax’ then developed its meaning to imply something wearisome or
challenging. So words like ‘duty’ were used to suggest a more
appealing purpose.

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Contd.
• The earliest known tax records, dating from approximately 6000 B.C.,
are in the form of Clay tablets found in the ancient city-state of
Lagash in modern day Iraq.”
• Greeks, Egyptians and Romans:
• The Greeks- taxes on property and goods.
• Unlike early Greek taxation, the Roman policies began to weigh heavily on its
citizens.
• Ancient Chinese societies also levied taxes on their citizens.
• Property tax in 600 B.C.- 10% of cultivated land to be dedicated to
the central government.
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Evolution of Taxation
History of Taxes in the Middle Ages
• Fair taxation was a key issue for many English citizens during the medieval
period. Most citizens were subject to a poll tax, which was a flat tax on every
adult in a jurisdiction, as well as property and church taxes. They were also
obligated to donate 10% of their labour or produce to the church.

• In the Middle East- Special forms of taxation that did not apply to Muslim
citizens.

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Contd.
History of Taxation During the Colonial Period
• Taxation policies developed quickly during the colonial period as wealth began to flow into
Europe from colonies in Africa, Asia and the Americas.
• Great Britain enforced the first general Income Tax in 1799 to help finance their war against
Napoleonic France.
• “No taxation without representation”
Recent Tax History
• The first federal income tax in the United States was created shortly after the Civil War. The
tax was not universal; it only applied to citizens above a certain income level.
• Many European nations adopted income taxes during the 19th century.
• France began to levy an income tax during World War 1, in response to the threat of a
German invasion.

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Scope of Taxation
In the absence of limitations provided by the constitution, the power to
tax is essentially unlimited, plenary, comprehensive, far reaching, and
supreme.
Taxation compasses every trade or occupation, every object or
industry or possession of property. It levies a burden which, in case of
failure to discharge, seizure or confiscation of property may be
enforced, subject to due process of law.

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Why does Government Impose Taxes?
• The primary purpose of taxation is to raise revenue to meet huge
public expenditure. Most governmental activities must be financed by
taxation. In other words, taxation policy has some non-revenue
objectives.
• In the modern world, taxation is used as an instrument of economic
policy. It affects the total volume of production, consumption,
investment, choice of industrial location and techniques, balance of
payments, distribution of income, etc.

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Objectives of Taxation
• Economic Development
• Full Employment
• Price Stability
• Control of Cyclical Fluctuations
• Reduction of BOP Difficulties
• Non-Revenue Objective

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Rates and Impact on Economy
Tax policy can affect the overall economy in three main ways:

1. By altering the demand for goods and services

Tax policy directly affects the economy by shifting demand for goods and
services.

When the prices of goods and services increases demand decreases.

But because of the utility and importance of the goods and services the
economy will automatically return to its underlying sustainable level as
people can not avoid using these goods and services for a longer period. 11
Rates and Impact on Economy
Tax policy can affect the overall economy in three main ways:
2. By changing incentives to work, save and invest

Tax policy can shift the economy’s sustainable output over the long run by changing
incentives to work, save, and invest.

Those effects depend in part on marginal tax rates, or the tax rate on an additional
dollar of income.

Reducing the marginal tax rate raises the after-tax wage, which can encourage the
person to work more.

Tax rates affect the incentive to save in much the same way.
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Rates and Impact on Economy
Tax policy can affect the overall economy in three main ways:
3. By raising or lowering budget deficits

A reduction in tax revenues increases the deficit.

A larger deficit implies increased government borrowing.

Tax cuts need not have adverse budget effects.

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Key Tax Polices Over the Past 3 Decades
• Reaganomics

Ronald Reagan reduces taxes by 30% over first 3 years. Focusing higher
income group.

Upper income taxpayers would now spend more and invest in businesses to
drive economic expansion and job growth.

Lower rates would translate into higher revenue, because more jobs meant
more taxpayers.

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Key Tax Polices Over the Past 3 Decades
• Reaganomics

Initially, inflation was reignited and this caused a recession that lasted for about 2
years, but once inflation was brought under control, the economy began to grow
rapidly and 21 million jobs were created during Reagan's two terms.

The national debt nearly tripled during his two terms, from $900 million to $2.7
trillion and tax revenues and GDP both rose by an average of 7% per year.

And it was also impossible to determine how much of that growth was due to tax
cuts versus deficit spending.

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Key Tax Polices Over the Past 3 Decades
• Clinton Years

 The impact of both tax increases and decreases.

 This tax policy increase the income tax rate to 36%, with an additional surcharge of 10% for
the highest earners and raised the corporate rates to 35%

 The economy added 11.6 million jobs, but hourly wages grew only 5 cents per hour.

 The stock market went on a bull run, as the S&P 500 index rose 78% after adjusting for
inflation.

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Key Tax Polices Over the Past 3 Decades
• Clinton Years
 After the tax increases, revenues rose 7.4% per year, GDP rose 5.6% per year, and the national
debt increased $730 billion.

 And after the tax cuts, revenues rose 8.7% per year, GDP rose 5.7% per year, and the debt was
reduced by $409 billion.

 While the data supports the contention that tax cuts were better medicine for the economy, the
second term had the benefit of the technology boom that produced the computer and internet
revolutions.

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Key Tax Polices Over the Past 3 Decades
• Conclusion

After that Barack Obama has consistently pushed for higher taxes on the "rich" to
help reduce the deficit, but does higher rates actually result in more tax revenues?

The problem is that changes in tax rates can't be analysed in a static environment.

The fact is that changes in rates alter behaviour and taxpayers will do whatever it
takes to minimize their tax burden.

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Taxation in India
• Levied by Central, State Government and local authority.

• Authority to levy a tax is derived from the constitution of India.

• Article 265- “No tax shall be levied or collected except by the authority of law”.

• In December 2017, net collections of direct tax was 6.56 lakh crore which is
higher than 18.2% over last year.

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Taxation in India
Initially Indian tax system was classified into two major head under
which different types of taxes were being levied.
• Income Tax

Direct Tax •
•
Wealth Tax
Property Tax
• Gift

Indirect •
•
Service Tax
Excise Duty
• VAT
Tax • Custom Duty, etc

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Taxation in India
• Letter on the tax system of India has been reformed with the
introduction of Goods and Service Tax Act.

• Where many types of indirect taxes were subsumed with GST, such as
Service Tax, VAT, Excise, etc.

• The major tax rates under GST is 0%, 5%, 12%,18% and 28%.

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India vs. USA vs. China

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India
• India has a three-tier tax structure:
• Central Government
• State Government
• Local Authorities
• In India, the authority to levy a tax is received from the constitution.
• Article 265 of the Indian Constitution states that “No Tax Should be
levied without the authority of Law”.
• Respective accompanying law passed by either parliament or state
legislative councils.
• In India, the taxes are classified as Direct Taxes and Indirect Taxes.
USA
• The United States of America is has its autonomous state and local
governments.
• It is a federal republic country.
• Taxes in USA are levied by both autonomous state and the
• local governments.
• The taxes include, taxes on income, property, sales, capital gains,
dividends, estates, gifts and imports.
• The taxation system followed in USA is Progressive Tax System.
• Taxes are incurred on incomes of the individuals.
• The reliance on direct taxes is more than the indirect taxes. 24
China
• China is a communist country.
• Follows the principles of socialism and depend largely on the taxes for
its revenue sources.
• Tax is the important element of the macro-economic policy of china
and has a high impact on socio-economic conditions in China.
• From the reforms in 1994, china has a well structured taxation
system.

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• There are currently 26 Types of taxes in china which according to their
nature can be divided into the following 8 categories:
• Turnover Taxes
• Income Taxes
• Resource Taxes
• Taxes for Special Purpose
• Property taxes
• Behavioral Taxes
• Agricultural taxes
• Custom duties 26
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Plucking the feathers
• Jean-Baptiste Colbert, the finance minister of Louis XIV of France
compared the art of raising tax to “Plucking the goose so as to obtain
the largest possible amount of hissing”.
• Tax systems vary from one economy to another. Yet in most countries
three flaws show how the art of plucking has failed.

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Defects in the Indian taxation system
• High rates and low yield of Direct taxes
• Low contribution of income tax
• Double taxation of dividends
• Absence of agricultural income tax
• Importance of indirect taxes
• Progressive taxes on I
• ncome
• Widening the indirect of Tax Net
• Regressive nature
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The 3 flaws
• Missed opportunities
• Expensive housing a boon to urban house-owners.
• An opportunity to yield windfall gains.
• House prices are approximately 34% higher than five years ago.
• This is freezing young people out of home ownership.
• Yet, Property taxes have stayed constant at 6% of govt. revenues
irrespective of the boom.

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• Works against other priorities
• Required focus on growing inequality.
• Yet, most economies have shifted the composition of labor
taxation slightly toward regressive payroll and social-security
levies.
• Away from the progressive taxation of income.

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• Technological changes
• Rising importance of intellectual property makes it almost
impossible to pin down where a multinational really makes money.
• Tech giants – Apple, Amazon (Ireland)
• Close to 40% of multinational profits are shifted to low-tax
countries each year.

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The way forward
• Fundamental tax reform can boost growth and make societies fairer.

• Principles to design good system:

i. Taxes should target rent.
ii. Preserve incentives
iii. Be hard to avoid

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Taxes should target rent
• Expensive housing has yielded windfall gains to homeowners in big
cities.
• Tax both property and inheritance more.
• Roll back recent cuts to inheritance cuts
• Introduce land-value tax

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Preserve incentives
• Taxing other forms of capital

Challenges:
• It discourages investment .
• Capital share of rich countries , GDP has risen by 4 percentage points
since 1975 , transferring nearly $2trn into investors’ pockets.

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Be hard to avoid
• Stop companies from shifting profits.
• Should switch focus from companies to investors.
• Corporate tax- can help to ensure that investors who do not pay taxes
themselves still make some contributions
E.g. Foreigners and universities.
• Full investment expensing should be standard.

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Contd…
• Deductions for debt interest , which incentivize risky leverage , should
be scrapped.
• Income taxes should be low or negative for lowest earners
i.e. it advocates progressive taxes rather than proportional taxes

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Possible impacts of Progressive System
Merits Demerits

• It tends to reduce disparities in • The benefit principle of taxation

the distribution of income and goes against the progressive
wealth. taxation system.
• It is productive as it yields more • It leads to greater scope for tax
revenue. evasion . It is the higher rate of
• It is elastic. taxes that encourages taxpayers to
evade their income by making
false declarations of their
incomes.

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