I do agree that lower taxation is good at least for the middle classes and above ones, but it requires some quantification and clarification. While it is true that lower taxation will leave more liquidity and therefore, more buying power in the hands of common man but still one needs to be worried about consciousness driven, though very much required at present, subsidies, and pressure on printing because of the two.
While it is true that lower taxation may spur economic activity and higher consumption and therefore, such would contribute to growth, the point is whether government's revenues would decrease or increase in net by attempting so. If they do decrease then the government would be compelled to print more and borrow more.
This would put upward pressure on inflation and therefore, may act as a self-correction to consumption. But suppose that tax revenues are not decreased by lowering down the tax slabs and removing or decreasing some direct and indirect taxes. Even then such a step could put a lot of pressure on the Indian Union government.
The point is that increased consumption by middle and upper classes would induce some much expected reactions among the most needy and poor. After all, all of us are humans. Call it a consequence of rising consciousness or inevitable result of high matured stage of Anthropocene as evident in converging psychological evolution in many parts of world but definitely in India, all of us, at least in India, are becoming more ambitious and aspiring.
Therefore, all Indians would like to consume and more. But if the middle classes don't consume much, the poor will adjust accordingly. This is the uniqueness of India.
But then many of us don't have money to afford even our basic necessities. Therefore, subsidies matter a lot and consumption is practically a cascading reaction starting from the very top and ending at the possible bottom of the society. Now it should be rather obvious that in order to let all Indians afford the very basic things in our daily lives, the Union government would have to provide huge subsidies, whether the Modi-government likes it or not.
The populism is also very well supported by politicians who many times have genuine reasons to resort to it and promise populist measures, otherwise unhealthy and imprudent. The process cannot be reversed after irreversibility has arrived as far as consciousness and awareness is concerned.
Moreover, a high consuming and growing society expects a lot from its government and the Union government would require a huge sum to invest in infrastructure and other necessities to meet the elites' expectations. The competition from peers puts a lot of additional pressure.
Therefore this requires huge funding and tax receipts, money resulting from disinvestment plans, money coming to India by foreign institutional investors, Indian expatriates, foreign grants and aids, assets sales, some cosmetic reduction in government expenditure, taming corruption and making more efficient governments, may not be sufficient to fund all the required subsidies.
Anyway, the governments do require huge money to invest in public good and all kind of social and physical infrastructure. So, the Union government has two additional tools at its disposal: to borrow more and print more. There are constraints up to which the Indian government can borrow without facing heat and undue pressure and printing is ethical up to a point.
Therefore, the increased consumption by able and largely independent classes may result in demands for higher subsidies by those who are not so. Subsidies would be taxing on the rising classes and the nation as a whole. Thus there is a balancing factor in the consumption, saving and growth. It is not an open ended game. Inflation can balance the rising aspirations of the middle and upper classes.
One needs to understand that lower rates are helpful in societies where subsidies are low and the economy is expansive. The case of Islamic world is different as they do it for the sake of economic doctrines outlined in Shariah and many of them are able to do it rather neatly because of revenues generated by oil-sales. Therefore, mostly Western societies and their polar counterparts can genuinely keep low tax rates.
Anyway, whether it is applicable elsewhere or not the fact is that Indian Union government has to be tricky while deciding about reducing taxes; direct and indirect. In India capitalism is a must but in patches. No matter how free-thinking the government be, the fact is that it cannot leave the helpless people in pathetic state as they are now. It is mostly intolerable now.
So, while it is imperative that levels of printing of the past be maintained by this government after accounting for growth and changing times, the same is true about taxation. But sure, one must quantify it. A drop in tax rates somewhere in between 1 per cent to 3 per cent could be helpful but definitely not beyond that. I am almost certain about it and also true to myself. There is nothing that Mr. Jaitley could do. Neither the Prime Minister Modi himself. It requires consensus in both the Houses of Parliament to arrive at decision about population.
The fact is that time has passed when added population as a whole used to give demographic dividends to the Indian state and its people. It's mostly a burden now and we need to do something about it whether the rest of the world does it itself or not. There is no point in having human suffering because few Indians could earn a lot. Rest assured, a majority of others won't get more than few cents in real time at INR's sound buying power level.
As Republican icon and former two-term US President, Ronald Reagan, very famously said, "You cannot tax business. Business doesn't pay taxes. It collects taxes."
And as Alexander Fraser Tytler, a Scottish judge and writer once remarked: "A democracy cannot exist as a permanent form of government. It can only exist until the people discover they can vote themselves largess out of the public treasury. From that moment on, the majority always votes for the candidate promising the most benefits from the public treasury, with the result that democracy always collapses over a loose fiscal policy—to be followed by a dictatorship."
Another reason to celebrate the caste system! India probably has too many defense mechanisms. Mr. Tytler's words just cannot come true in India. Sure, he is proved wrong on the free world and by bigger measure but for different reasons. To be correct, the caste system acts against too much populism and courting against a single majority.
Then by the same arguments shouldn't subsidies be denied to unprivileged and underprivileged? The answer is it will be promised and delivered from New Delhi and state capitals, whether it reaches the targeted people or not is quite a different thing.
We will face all the consequences of it. Whether it benefits the needy and poor to the extent desired or not is a completely different thing. But sure, true democracy may be lost in India while attempting to strike a balance between populism and fiscal rationalism. All of us should be cautious about the future that may lie ahead of us.
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