Friday, December 9, 2022
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Dear young IRS officers, taxing the rich in Covid times is bad economics

Accusations of ‘tax terrorism’ predate the pandemic. It should have rightly caused the IRS leadership to reflect on their own set performance metrics.

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The Narendra Modi government did well to promptly dismiss a proposal put up by a group of young Indian Revenue Service officers that recommended raising a number of taxes to make up for the government’s revenue shortfall amid higher spending requirements as a result of the Covid-19 pandemic. A prompt and public rejection of the proposal was warranted because even the whiff of an increase in taxes can deepen the crisis and prolong the recovery, because the already-mauled individuals and businesses will choose to play it safe by holding back on spending and investment.

That said, the government should not have gone further and taken disciplinary action against the intrepid officers. They were clearly acting in good faith. Barking up the wrong tree is not an offence and should not be penalised. A crisis is an especially important time for top leaders and civil servants to keep ears and minds open, and encourage fresh thinking within the government’s ranks.

Where the officers erred was in not taking the precaution of forwarding their recommendations under extreme secrecy. Even so, the official rebuke has quite likely chastised them enough. It is not in the public interest to demoralise them so early in their careers by throwing the book at them.

Also read: India doesn’t want taali-thali charity from billionaires, it wants Socialist state to act

A cultural problem

New entrants to the IRS can hardly be blamed for internalising an organisational culture that prizes extracting even larger revenues as a measure of its performance. If anything, this episode should cause the Service to introspect whether finding innovative ways of extracting taxes and catching evaders is all that there is to their jobs.

Accusations of “tax terrorism” predate the pandemic and should have rightly caused the IRS leadership to reflect on how much of their zeal is properly directed. Further, all Services must urgently review the economics curriculum at their training academies — for it is disturbing that some of our smartest young people should think that raising taxes during an unprecedented economic crisis is a good idea.

To be fair, in the general public discourse “tax the rich” is a popular emotional answer to most public policy problems, not least because the “rich” are people who are wealthier than “us”. There is a Robin Hood inside every one of us.

Also read: Modi govt distances itself from ‘Covid tax’, to act against IRS officers who floated idea

Why taxing the rich is not always a good idea

Over the past decade, the inequality debate in the West has led to a surge of “tax the rich” proposals, and every new development — from financial crises, election results, corruption scandals, artificial intelligence, robotics and now, the pandemic — have been occasions to renew the calls for raising taxes and income redistribution. Whether these proposals make sense at all depends on the particular circumstances of the country concerned, but ideas cross national boundaries in the form of intellectual fashions, and many of us Indians are seduced by them too. Few bother to work out the numbers. If they do they will find that many of these fashions don’t make a lot of sense in our context.

“Tax the rich” is a particularly bad idea at this time. What Mark K Perry wrote in Seeking Alpha during the 2008 Global Financial Crisis applies even more to the situation today: “If you want to turn an economic slowdown into a recession, or an average recession into a severe recession, or a severe recession into a depression, raising taxes would surely help make that happen. It surely helped turned the recession of 1929-1933 into the Great Depression.” The Hoover and the Roosevelt administrations raised a number of taxes after the economic crisis of 1929, which made the problem worse and more prolonged than it might otherwise have been. The peak tax rate went up from 25 per cent in the early 1930s to 79 per cent in 1936, exacerbating the crisis until World War II came along and post-war economics turned things around.

Many people casually argue that taxing the wealthiest people won’t hurt the rest of us. But it does. When rich people spend less, when they invest less, or invest in assets to avoid tax, the multiplier effects are smaller. Our own experience shows that taxing the rich 97.75 per cent of their income in the early 1970s gave the poor only the slogan of “roti, kapda aur makan.” We started making a dent in alleviating poverty only after the tax rates were lowered to a maximum of 40 per cent in 1992, creating a growth spurt that we have been riding on ever since.

That’s not all. Quite often “tax the rich” ends up taxing the middle class. Let’s not forget that the really wealthy have access to better tax planning, better chartered accountants and a variety of ways to legally reduce their tax exposure. They can also relocate to a lower-tax jurisdiction with relative ease. The salaried middle-classes do not have such options and end up in higher tax slab. This further depresses demand as middle-class households cut back on discretionary expenditure. So as much as “tax the rich” has a folksy good feeling to it, it hurts the poor in normal times and will hurt them even more during a recession.

Also read: IRS officers’ tips to revive economy and how radical ideas of 1970s are lurking in the air

Tax relief is the answer

Far from higher taxes, the crisis economy needs immediate tax relief for both corporate and personal taxes. And to galvanise economic growth, we need lower tax rates and a massive simplification of the tax code, including the GST.

This means that tax revenues will decline in the short run and government will have to spend more to provide relief and stimulate growth. Where then do we find the money? The answer, in short, is borrowing. At the risk of sounding like a fugitive guru, debt financing is about us borrowing from the future “us”. Taking a loan from the future “us” so that the current “us” might survive is justified. It is also justified when the money borrowed from future generations is used to create assets — like hospitals, educational institutions, metros, highways, airports — that the current generation can leave behind for them.

In other words, the government must not be shy of running fiscal deficits during this recession. As the former Reserve Bank of India (RBI) governor C Rangarajan has said, some of the deficit can be financed by getting the central bank to monetise it. By printing more money the RBI is unlikely to set off higher inflation immediately, given the extraordinary plunge in demand. Similarly, government borrowing at this time will not crowd out the private sector, because the latter is not confident enough to restart the investment cycle.

As M Govinda Rao cautions, fiscal deficits and their monetisation must be watched very carefully and dialled down as the economy picks up speed. That’s not going to be easy, but it is a problem for the future. It is also the kind of policy challenge the brightest young minds in the IRS should be thinking of solving. For they will encounter it a few years down the road.

The author is the director of the Takshashila Institution, an independent centre for research and education in public policy. Views are personal.

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  1. The officers concerned are not new entrants .They have more than 20 years of experience in the department. The making of recommendations public could have had adverse effect on the business people who are already under pressure due to the lockdown..People in general dont know the structure and in all probility would view the recommendations as the govt policy.

  2. The officers concerned are not new entrants .They have more than 20 years of experience in the department. The making of recommendations public could have adverse effect on the business people who are already under pressure due to the lockdown..

  3. Unfortunately our education curricula as well as the Govt. recruitment process and the policies are anti wealth creation. We have been very poor in wealth utilisation and even not to mention the uncontrolled unproductive expenses. All these officers – IRS/ IAS/ IFS/ IPS, etc. belong to a culture of political yes-manship and almost all of our political class only knows appeasement as a vote catching tool. As a result we never punish any one for wrong doing. I sincerely hope that current Govt. will show the courage to make some deep and fundament changes to our Governance model.

  4. This report by young officers makes me wonder if the SOCIALISTIC curriculum of IRS training course has been updated in last 29 years since 1991. Also if senior officers had revision courses on this subject.

  5. So the commentator thinks that it is the daily wage earners and the middle class should be taxed to fund the shortfall. No burden on the rich. Govt. should spend on central vista, bullet trains and staues. I am sure such wisemen are rare to find and only born in BJP heaven.

  6. The disciplinary action was warranted.
    The proposal should have been forwarded through the normal departmental channels and not in the Media.
    The impact on the business community and the wealthy should have been calculated more carefully.
    Which is why a non-IRS officer heads the tax levying structure.

  7. There is too much bulls..t going in these arguements. For some, like this writer here, who theorise on behalf of corporate interests, tax itself is terrorism. They have no advice for the rich who still build their empires on the backs of cheap labour. Let common wages be adjusted to inflation, currency, economy and basic needs across the globe, then we’ll see how competitive or meritorious Indian businesses largely are. Look at the private wealth they have amassed. No govt has been able to motivate them to share the riches earned on this land with their countrymen. Not even this patriotic govt that put a 1.4 lak cr waiver in their pockets as corporate tax cuts even as they claimed in courts they were getting their plans ready to face Covid. And this is not some post-Covid talking. This has been the Indian experience forever. For the writer, that the rich won’t pay taxes is commonsense. And he wants us to accept it. That’s the most objectionable part of this rubbish. And instead of looking at the stark income differences he builds his theory around how taxing the rich will bleed the poor. It will. So why not begin by asking why it should be so. But that requires thinking and economic philosophy, which the writer lacks. No matter which university he is from.

  8. Tax the common man and get away with a pat on the back. Maybe “double promotion”.
    Touch the rich,tax them to prevent free flow of black money and burn your fingers. Politicians do not get monthly salary for “social work”. Super Rich reward them for Political work and give them unlimited incentives. Common man follows the Politician and the Politician follows the Rich. Universal Truth.

  9. The article is too way off the reality and only based on what the author has been fed or read in the media. Who sets the target for collection for each year? Who says Annual appraisal will be based on achievement of targets set? Can the targets raised by 10%-15% every year without considering the state of economy? Why is the top Revenue administrator never responsible for low revenue collection? has top revenue administrator ever been a direct tax collector – contributor of 55% AND what role in collecting indirect taxes also? All news article after that report of some officers has jumped the gun and not delved in detail about pro- people measures.
    Quite agree that raising tax rate was not a good suggestion.

  10. This is a joke. And based off the ads I’m seeing I’m not so surprised to hear this agenda being spat at me. Corporate tax breaks are not the answer; trickle down economics are the equivalent to santa claus- he exists in theory but really not at all.

  11. The report by IRS officers shows the deeply ingrained mentality of a typical government servant in India. He is there to extract a just tax from the dishonest businessman and collect it for the government to spend on the welfare of the poor. In the process, if he can enrich himself by way of some deal with the tax payer, that is even better as he collects for both government and himself! In this schema, business class is presumed to be looters and only thing that the government can do is to collect taxes and redistribute wealth. there is no clue of how wealth creation and distribution process at given time and over a given period works.

    Government took a right decision to call for their explanation as this is not their official job nor any one asked them to give their views. Such non sense must be stopped; we have surfeit of self styled free advisors on every issue and we do not need one more set of such advisors, especially from within the government.

    Anyway, hope Modi now comes out with practical measures to kick start economy, before IAS officers comes out with their own recommendations!.

  12. “That said, the government should not have gone further and taken disciplinary action against the intrepid officers. They were clearly acting in good faith.”

    “It is not in the public interest to demoralise them so early in their careers by throwing the book at them.”

    These are strange statements to make when writing about something that is seen by so many as poorly researched and thought through.. It should be reasonable to expect that the care of the country’s financial well-being is entrusted to people who are actually competent. India suffers because we excuse incompetence by declaring it to be in good faith.

  13. IRS & Income Tax Officers are corrupt. They earn Crore Rs per month by bribe. Please tax 40% on this IRS & Central Government officers

  14. Well written. Perhaps we should all appreciate the zeal of those officers who were only doing what they were taught, collecting taxes at any cost. This entire fiasco goes to show that poor economics is in the psyche of even the cream of the country who become IAS/IPS/IRS etc. One day we should all go to
    a Pilgrimage, to the Lenin’s statue in Lutyen’s Delhi. It is him and likes of him that was venerated for so many decades and that veneration brought bad economics into Indian education.

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