Column : Opportunity forgone

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Bibek Debroy : Mar 12 2011, 20:44 IST

Those who earn income above a threshold must pay income taxes. Taxes are not fees. Fees involve quid pro quo. They are paid for specific services. There is no such quid pro quo for taxes. They sink into the Consolidated Fund and notwithstanding the parliamentary scrutiny about expenditure out of this Consolidated Fund, there is tax-payer fatigue and apathy about payment of taxes, since no such benefits are seen to flow. These benefits can be in the form of either public goods or collective private goods. Alternatively, these benefits can be equitable considerations of cross-subsidisation. Taxes collected from the relatively rich are used to subsidise the relatively poor. Unfortunately, tax and expenditure policy have been cluttered up and made non-transparent, with confusion about what is being done and for whom. Consider this business of subsidising the poor. Apart from the problem about not being able to identify BPL unambiguously and refusing to accept participatory and decentralised identification, is the current system of subsidising through administered prices most efficient? This is relevant not just for central subsidies such as petroleum, food and fertilisers, but also for state-level ones like roads and power. Under-graduate economics texts have demonstrations that direct taxes are superior to indirect taxes, because welfare gains are greater.

By the same token, direct income transfers are superior. By this, one means direct cash transfers, assuming financial inclusion proceeds, not this business of messing around with coupons and conditional cash transfers. The recent Budget has apparently promised this, though one should

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