Sunday, 22 January 2006

Cut tax burden on the poor: Lord Desai

Thursday, January 19, 2006 21:11 IST]

At a time when the Left is attacking liberalisation as being anti-poor, eminent liberal economist Lord Meghnad Desai argues forcefully for reducing the taxation burden on the poor and pushing it on the rich. In an interview with Seetha, Lord Desai talks about what kind of a budget a liberal economy needs.

What should be the priorities of the Budget?

The most rapid elimination of the revenue and fiscal deficits. A good husbanding of public money and avoidance of deficits is not a reactionary idea.

How is this to be done?

Expenditure has to be cut to the bone. Have a 10-year freeze on public sector recruitment. Any pay commission settlement should only be in the form of indexation of public sector salaries. There should be no upward drift. Then cut some taxes and increase others. I would cut commodity taxes. I am a great believer that whatever taxes fall on the poorer sections should be cut. The poor consume more than what we think they consume. As far as possible on the non-luxury end, cut tax, put it on luxury, on things like capital gains from property transactions.

But isn't that a somewhat socialist solution?

No. Even for a liberal, I don't see why one should tolerate excessive income inequality when it does not contribute to further growth.

I do not buy the Keynesian argument that we need consumption. We're not in a Keynesian situation. It is quite possible to say we don't want to stop anyone from buying anything, but we're going to tax. Especially on capital gains from land and property deals. The United Kingdom has it. There are certain concessions, certain thresholds.

The Left has been talking about tax on five-star hotels, discotheques, malls, inheritance tax etc.

Well, they don't want to cut expenditure. Just put a VAT on all this. Inheritance tax is a separate issue. It will be very complicated in the Indian context because of the Hindu property laws etc. Very often this burden falls on the salaried, who cannot avoid by creating other shelters. Overall, I would like expenditure to be cut, some taxes to be raised and others to be lowered.

If you are in favour of reducing indirect tax, then that would involve raising income tax and corporation tax.

Increase in tax rate does not increase the tax intake. The right approach is to increase the base. This issue of taxing agriculture. The government brings in so many constitution amendments at the drop of a hat, they should bring something to make taxing of agriculture possible. They should be able to tax wealth and capital gains arising from land transactions. A lot of urban income is being disguised as agriculture.

Services are undertaxed. That's another big area. Consumption taxes have to be justified on grounds of equity and contribution to growth. Because the poor don't have certifiable income they pay other tax. I am really very concerned that the very poor buy something, they don't know they are paying tax. Why are we robbing them all the time by making them pay taxes.

We need to examine the incidence of tax by income classes and try and see how we can reduce the burden of tax on the poor. What we need is more compliance and easier implementation. Why not have self reporting. It is done in the United Kingdom. You should trust people. It will work.

What about expenditure?

The government machinery has to cost less. The cabinet is too large. The government should get out as far as possible from productive activities and privatise as much as possible. Instead it should spend on purchasing health and education.

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