Saturday, March 30, 2013

Tax System - Simplified

What is tax? Well, there are hell lot of view about this. Let take it as a tool for redistribution of income. We can also say that tax are imposed for fulfilling expenditure obligations of the government. Lets see some terms about tax. Incidence of tax - the event of tax being imposed. Impact of tax - when tax makes its presence felt, that is impact of tax. Direct tax - (Incidence + Impact @ same point) i.e., the tax is being imposed on you and you feel it. Indirect tax - (Incidence + Impact @ different point)i.e., the tax is being imposed on you but you make others pay for it.

Okay, lets see how taxes are imposed on people.
1. Progressive Taxation
You gain more, you pay more taxes. This may seem like, you are getting rewards for being poor. And the riches get the punishment og more tax so they try to evade taxes.
2. Regressive Taxation
Its the opposite, If you earn more you pay less taxes. This is imposed on small industries excise duty. If they produce more they can pay less taxes. Hence SMEs encouraged.
3. Proportional Taxation
Whatever your earning may be, you have to pay a fixed tax.

Hmm, How good a tax system can be?
To answer this question economists give some principles. So if a country's tax system follows those principles, then it is deemed to be good tax system. So, what are they?
1. Fairness
Persons in similar situation should pay similar taxes (Horizontal equity). And the 'better off' people pay more taxes (Vertical equity).
Cost of payment of tax should be less (Online, one click instead of long queue in IT office). And the tax system should not decide how much you save or invest or spend etc (Less interference on the allocation of resources). Moreover, by imposing tax on pollution, smoking nation will get double divident (money+social purpose).
3. Administrative Simplicity
The activities like computation, filing, collection, etc of taxes should be as simple as possible.
4. Flexibility
The tax system should be in such a way that it can be modified easily in future.
5. Transparency
The government should say aloud that "I got this much money from taxes and I gave you these services".

Wow! Now the government have tax money collected. So what it should do with that?
Well, It has to obviously spend on development. Here also three types are present - Progressive, Regressive, Proportional. Here, progressive spending is good. Because, its always good spend only as much as you earn.

Indian Economy - Ramesh Singh

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