Abolishing the present – income tax system – I
(This is the FIRST article in a SERIES on the subject).
The normal course of action available to any government bent on reducing budgetary deficits is to resort to higher taxation, very few establishments practice tight fiscal control. This is a Catch-22 solution as an increase in taxes tends to lower productivity, letting loose a vicious cycle of job depletion, economic recession, etc. While there is genuine public outcry on taxing farm income, we do not have any political kamikaze willing to go this route, a damned if you will, damned if you won’t political hot potato. Given that most of our legislators are agriculture landlords (and given the present political system will continue to be), imposing of agriculture taxes has as much hope as a snowflake in Jacobabad in the month of June. The result is that a majority of our population has a free ride on the taxes imposed on an unfortunate successful, efficient and/or salaried minority of the masses. Instead of an even spread of taxation, too many depend upon the income of the too few. In the meantime tax evasion has reached new levels of sophistication, the affluent employing an army of taxation specialists whose sole purpose in life is to discover tax loopholes and to exploit them to the detriment of public revenues. The richer you are the less likely you are to pay government dues, the salaried class, particularly the public officials and armed forces officers share the tax burden, the tax being deducted at source.
The concept of taxing income is derived from the pious and sincere intention of equitably collecting revenue from those having the ability to pay, any form of taxes on productive activity has to be a regressive measure, the net effect being to penalise initiative and hard work. Mr Nasim Beg, Managing Director, Polymer and Precision Engineering (Private) Ltd, and a Chartered Accountant, has been arguing since 1986 the case for abolishing traditional income taxes, the writer acknowledges with gratitude sustained help from him in crystallising the various financial ramifications and taxation issues in the course of this article. Mr Nasim Beg states “Direct taxation including tax on income is accepted in developed countries where governments have a history of being accountable and a track record of ensuring that the taxes collected are spent for the benefit of tax payers. Economic theory that has evolved in the developing countries cannot necessarily be applied to Third World countries, especially direct taxation which has historically been collected by imperialist powers through their bureaucratic agents for the benefit of the rulers. Indeed, the standards of living in the imperialist countries improved rapidly at the cost of the ruled in the colonies. Continuing application of such taxes, especially on income will only result in continuation of attempts by the population to evade taxes which perceives such taxation as a means of perpetuating bureaucratic rule”.
The basic premise being that one only gets taxed if one has the ability to pay, this tantamounts to punishing efficiency and success on a directly proportional basis. At the same time, we have established a vast environment of tax avoidance and evasion through a coordinated measure of outright corruption and fraud, because it is the successful and the efficient that are the usual culprits engaged in efficiently and successfully avoiding taxes. While the loss to government revenues is apparent, the loss of ethical basis for respect at the upper echelons of society is worse, it is demeaning and degenerating to the moral fabric of the nation. In USA, where reporting systems are better monitored, beating the Internal Revenue System (IRS) is a national pastime yet a fair amount of taxes does get collected.
How do the affluent get away avoiding income taxes? Broadly speaking this is done by (1) non-disclosure of income (2) making of tax deductible by wasteful expenditures like excessive entertainment, travelling, communications bills, etc. (3) inflating the cost of business assets (which is a South Asian pastime) (4) inflating the cost of imported inventories and lastly (5) by the self-perpetuating corruption-evasion tacit agreement between the collection agents and the tax payers (or rather tax-avoiders).
The most serious and flagrant omission is to keep receipts from sales proceeds of goods and services away from the auditable book of accounts, thus pushing that income straight into black money, in turn black money becomes eligible for illegal transfers abroad. Most businesses keep duplicate and even triplicate books of accounts, the original one for their own real records, the second one for their collaborators in the revenue collecting department and the third one being the “official” accounts on which the revenue collecting department assesses the amount of tax to be levied.
By over-invoicing purchase prices of machinery, goods and services multiple advantages are gained. By inflating the cost of business assets (1) higher depreciation makes for lower taxable income (2) higher interest charges on inflated bank borrowing further reduces the taxable income and (3) there is creation of black money, in local currency and in the case of imported assets, in foreign exchange. This directly or indirectly results in (1) lower revenue collection figures (2) illegal foreign exchange transactions (3) creation of black money enhances the power of evil in society (4) tying up of the already tight bank credit for higher amounts and longer durations thus making it unavailable for the more deserving (5) lower dividends for minority shareholders with resultant detrimental effect on formation and growth of capital markets and lastly (6) higher interest and depreciation costs results in higher production costs and selling prices, these in turn tend to be inflationary as they are easily passed onto the consumer.
The best known (and disgustingly universally admired) commercial secret is that most industrialists inflate the cost of imported inventories thereby skimming off the top in foreign exchange. This results in inflation because of lower profitability and as such lower tax payments. When setting up an industry many industrialists put up their share of the capital (equity) by over-invoicing.
Not the least of constant aberrations is the complete degeneration of the tax collection system, so debased as to be almost totally corrupt. This has been a self-perpetuating exercise where the corruption-evasion partnership regenerates by feeding on each other. As the income tax machinery requires a large revenue collection staff, this affects the cost efficiency. If the agriculture income is brought under tax purview this problem will force-multiply, corruption becoming more widespread.
By doing away completely with the present taxation system, certain other aberrations affecting the economy will be tackled effectively through these factors which are not directly related to the income tax system in vogue today. These additional benefits would be that (1) blackmarketing and hoarding because of easy availability of black money or low cost credit would be done away with and (2) the huge amount of money tied up in non-productive assets such as idle or sick industrial units, would be freed, because the bank would have to recognize bad debt which they do not at this time in a very cosy arrangement for all concerned. They would have to put these non-productive units in the hands of receivers which would allow the salvage and utilisation of these idle assets. Since most of these bad debts are irrecoverable they appear in the national statistics on which planning is based thus driving the planning out of gear because of the wrong figures.
At this time public revenues sustain a huge tax collection system that eats up a substantial amount of the pie they are supposed to collect, officially because of the administrative costs of maintaining them and unofficially because of the kick-backs that tax-evaders part with to lessen their tax burden. At best our tax collection edifice is a corrupt white elephant and any pontification otherwise is sheer nonsense, various reformers have surfaced from time to time and then perfunctorily disappeared into oblivion. No amount of reforms is going to change this lot, they are self-perpetuating, flourishing in a welter of their own web of corruption and deceit. Whether one increases or reduces the taxes, the people responsible for collection are very fallible human beings who will not give the public system a fair rate of return. Punitive measures are promised, seldom adhered to, how many income tax officers and staff have been charged with malfeasance in the past decade (or for that matter recalcitrant businessmen), are we to believe that this represents the full graph of the corrupt?
The time has come for making radical changes, to look at the system itself and deal with it as one would with cancer.
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