Inflation is a tax that shrinks real incomes and reduces purchasing power
Nobody likes paying taxes. When taxes are paid indirectly—for instance, when one purchases a commodity on which excise duty or customs duty has been levied—many do not readily recognize the fact that taxes have been collected.
Even when service tax is imposed on a restaurant bill or when entertainment tax has been charged on a movie ticket, the incidence of tax is often not noticed. Such indeed is the way the human mind tends to work.
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| Paranjoy Guha Thakurta |
If, on the other hand, an individual is asked to pay a direct tax on her or his annual income, it tends to hurt a lot. Why? The reaction is purely psychological. When income tax is paid by a person, she or he gets an impression that the government is taking away a portion of her or his hard-earned income. If one is particularly disillusioned with the country’s political and bureaucratic leadership, as large sections of the Indian middle classes are, then one complains that the taxpayer’s money is not being properly spent by the powers-that-be.
At a rational level, most individuals understand that the government has to impose taxes of different kinds. The revenues collected are used not merely to pay the salaries and perks of our infamous netas and babus. The government collects taxes to spend on what society needs, such as electricity, roads, water, healthcare and education, to name some of the most crucial sectors of any country’s social and physical infrastructure. It is crucial that the State spends on these sectors simply because market forces are either not operational or work at the margins. At best, one can conceive of public-private partnerships in infrastructure ventures. That’s not all. The government of today’s generation also has to invest in facilities that will be enjoyed by future generations—say, in a park.
The short point is that much as we hate paying taxes, we don’t really have a choice. Taxes have to be paid in all civilized societies and the best we can hope for is that the elected representatives of the people and civil servants will spend taxpayers’ money in a prudent, proper and efficient manner, so that funds are spent on those who need them the most. After sixty years of independence, for the first time, the share of direct taxes (on the incomes of individuals and the profits of companies) in total tax collections has gone above the share of indirect taxes (mainly excise and customs duties).
This new trend in the government’s tax revenues signifies a positive development. Indirect taxes by their very nature are regressive. In other words, everyone pays the same tax, irrespective of whether the person is rich or poor. For instance, if 40 paise is the tax element on the retail price of a matchbox, the same tax is paid by a beggar on the street or by a Tata or an Ambani. Direct taxes, on the other hand, are progressive, which means the higher a person’s income, the higher the proportion this person pays as personal income tax. Direct taxes are, therefore, to be welcomed, as the amount collected by the exchequer has a relation to a person’s income and hence, her or his ability to pay.
A not-so-well-known fact about India is that barely three per cent of the total population of the country pays income tax. There are just about 30 million income tax assessees in a nation of 1.1 billion people. Of those who pay income tax, roughly two-thirds have their taxes deducted at source before their salary reaches their hands or gets deposited in bank accounts. Gentlemen farmers with huge incomes don’t pay a paisa as tax because income tax is not levied on agricultural income.
However, of late, a different kind of tax has been hogging headlines. This is a hidden tax called inflation. Inflation hurts the poor much more than the rich. The incomes and profits of the affluent often go up faster than the speed with which prices rise. But for fixed-income, salaried persons as well as the underprivileged, inflation is a tax that shrinks real incomes and reduces purchasing power.
In recent months, inflation has been driven by high food prices. This is akin to a double tax on the poor who spend a larger proportion of their incomes to fill their bellies. According to the official wholesale price index, the rate of inflation in the country is currently in the region of seven percent. Few believe the government’s statistics. The reality in the marketplace is very different. Prices of edible oils, wheat, rice, milk, dairy products, fruits and vegetables have all jumped by far higher proportions. Why do you think India’s ruling politicians are jittery? They realize that even if the classes rule, it is the masses who vote.
The author is an educator, an economic analyst and a journalist with over 30 years of experience in various media—print, radio, television, Internet and documentary cinema.
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