It seems Sam Pitroda has gotten himself embroiled a controversy by proposing the reintroduction of the Inheritance Tax, a tax once abandoned during the tenure of Pm Rajiv Gandhi. Mr. Pitroda claims to have copied the idea for the Inheritance Tax from the US, where the Inheritance Tax is implemented in a couple of their States. This proposal stirred up the debate about taxation. People, many of which screwed up the tax-code in the past, felt called upon to belittle Mr. Pitroda with the usual cruelty the Internet has to offer. The BJP in full campaign-mode quickly spread the claim, that Congress would x-ray homes to take away the family-gold.
A word of advice: It is never a good idea to blindly mimic the US, a country in a debt-spiral of almost Chinese proportions (that urge to mimic the US is another sign of a failing education system in India).
The Inheritance Tax had failed India once before; the enforcement of this tax actually cost more than it gained. Taxation is the most effective with partners, that either don’t know or trust each other. In contrast, with the Inheritance Tax the money usually flows to friends and family. The deceased person has an altruistic motive to have the entire wealth bestowed to the heir. The Wealth Tax fairs even worse, because it doesn’t tax any financial transaction, but economic inactivity. For both taxes the Government would have to drastically invade the privacy of those it seeks to tax; both forms of taxation are unenforceable!
Mr. Pitrodas proposal nonetheless provoked a positive debate, that is essential in a libertarian society: People are wondering how much money they surrender to the Government.
Citizens around the world really pay for the salary of unproductive Government employees, not for essential Government services or programs. Somehow those Government employees convinced their fellow citizens, who otherwise nickle and dime their handyman, retailer or restaurant, that paying high taxes is a testament to their patriotism. It is an established fact, that most welfare-programs redistribute wealth from the bottom to the top, not the other way around! Besides, there is little evidence that any of those welfare programs ever archived its stated aims. The fundamental truth is that Indians pay too much tax already! Politicians always displayed the habit of collecting taxes to redistribute those funds to their political backers. By that, economic power has been diminished, while political power has increased: It simply doesn’t pay to be productive, but it became very profitable to ingratiate oneself with the politicians, who control those funds. On top, the Indian tax-code is a myriad labyrinth of unnecessarily complicated rules, that leaves entrepreneurs and tax-collectors alike confused and so far has hampered investment or productivity. It did however increase the bribes for the tax-collector to look the other way. The Indian tax-code has caused a huge black market and is one of the reasons for Indians exchanging their rupees for gold.
The ability to generate revenue via taxation is limited by the Laffer curve. It proclaims taxation of income above a certain height paradoxically reduces returns for the Government, but such high taxation dampens economic activity and by that lowers tax revenue.
Next to a simple understandable tax-code, one of the best investments a Government can make in order to facilitate correct taxation is digitization for collecting receipts. One can imagine a system linked up to the UPI-network, that automatically generates receipts those for every trade.
Each administrative level shall have a Treasury to manage the wealth of the Government as well as the Exchequer exclusively to collect taxes; both entities should not be merged for both tasks to be executed efficiently. A person shall pay taxes for every Municipality and every State that person has an registered address in.
Categories of Taxes
Essential for a booming economy is a simple understandable tax-code; there can be no loopholes, exemptions, tax-holidays, tax-credits. Taxation must not be a tool to regulate behavior, not even encourage behavior universally considered to be positive (like saving for retirement, investing in education, etc.); every loophole is an interference with the free-market. In general, the rules of taxation are just as important as the amount of money to send to the Government.
Income Tax
The Income Tax, that is tax over all income in a particular month regardless of the source of that income; pricey gifts (cars, houses, etc.) as well as employee benefits (free food, insurance, etc.) shall be considered income as well. The Income Tax shall be the almost exclusive source of income for the Government. Different brackets of income shall be have individual tax-rates, but the tax-rates shall increase with increasing income.
Taxation of Capital Gains (that include interest from bank accounts, dividends, stocks, assets, etc.) must be exactly the same as taxation of income; if not, then the value work is disadvantaged visa vie value of financial instruments / stocks / assets. The moment at which capital gains tax is taxed shall be the moment of payout. One can imagine mandating dedicated trading accounts at trading houses, which could be used for investing only. Once any gains from investment is transferred out from the trading account to the normal account, those gains should be taxed.
It makes sense to streamline the collection of the Income Tax: Each Municipality and Union State can register their tax-rates with the Union, the Union then collects those taxes and distributes those funds without deduction to the respective Government.
Emergency Income Surtax
In events of emergency, after the relevant Government has declared emergency, this Government can raise a Surtax on already taxed income for the duration of the emergency to pay exclusively for that emergency.
Land Tax
The Land Tax is a fee on parcels of land. The fee is based on the estimated value of this parcel and is set and collected by the Government (either the Municipality or the State) controlling that land. The fee for already leased out land can be adjusted over time by the responsible Government.
Luxury Tax
The Luxury Tax is levied on the possession or operation of goods and service considered as luxury such as private jets, yachts, etc..
Environmental Tax
The Environmental Tax is levied on environmentally irresponsible activities such as fuel-consumption, producing pollutants, meat-production, etc..
Tariffs
The Union-Government can collect Tariffs on goods and services entering the nation. However, it is important to prohibit any Municipality or State inside the Union from collecting any Tariff.
Sales Tax
One measure to increase honesty in the payment of taxes is to impose a fully refundable Sales Tax, an improved version of the Taiwanese Receipt Lottery. The seller is to pay a small tax (~5%) on any trade (regardless of the category of good or service traded), that the buyer can redeem in full. The Sales Tax shall be levied on income as well, where the employee actually has to hand in the receipt of the income. That way, the seller is under constant pressure to hand in all receipts, because the buyer has a financial self-interest to hand in the receipt as well. That money would be booked back to the personal bank account or the buyer registered with the Government at the beginning of each following month.
Profit Tax
Profit, that is income deducted by expenses of a business (regardless of the category of the business), shall be taxed lightly. That tax needs to be low (~10%), but it is as necessary just as much as the Sales Tax to make businesses collect and hand in receipts and by that offer the Government a clear picture on the flow of money.
Government revenue is one issue, Government spending another. The more Government spends, the more it displaces the private sector. Accountability for how those funds are spend is lower in Government than in the private sector. Ideally, each administrative level should spend money completely disjoint from each other. The Union should restrict itself to spending for defense, police and diplomatic missions around the world. The Municipalities shall spend on infrastructure inside the Municipality, the States for infrastructure inside the States and outside the Municipalities. Welfare-programs shall be delivered by Municipalities. Regulating the environment, healthcare and education shall be the responsibility of the States.
In general, overall Government spending shall not exceed a certain percentage of the economy and funds should not shift between the various Governments.
Clear by now, that China will not be the next global superpower. The clearest sign of the downfall of China is the debt of each individual administrative level in that nation.
Producing both inflation and debt is unfortunately in the self-interest of politicians, because it allows them to hand out money they do not have without forcing their fellow citizens to restrict themselves. On that issue democratic systems like the US don’t fair better than autocratic systems like China.
Any stable nation therefor needs clear strong political incentives to manage the finances of the Government wisely with strict rules to avoid any or reduce existing debt. One solution is to implement a new Government system and by that to abandon elections, since the desire to be reelected is the primary reason why politicians overtax or overspend.
