Beyond UP elections 2017: India must raise more revenue from income and property taxes vs sales taxes

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Updated: March 22, 2017 6:19:44 AM

India must raise more revenue from income and property taxes versus sales taxes.

UP CM Yogi Adityanath. (PTI)

One hopeful narrative from analysts of India’s political economy has been that once the national government was able to improve its position in the Rajya Sabha, it would focus on an economic reform agenda. Note that such a narrative does not depend on whether the reforms are “pro-market” or “pro-business.” An early use of these terms in the Indian context was by Atul Kohli, a Princeton University professor, and his view over a decade ago, since seemingly borne out by events, was that India’s economic direction was more toward the latter, favouring large business and state-supported development (approximated by East Asian successes), rather than some version of the competitive market ideal associated with the recent Anglo-Saxon approach to the economy. Indeed, the current leadership has seemed more comfortable with nationalism and virtue as drivers of economic progress, rather than enhancing competition and entry in various markets. In any case, the choice of the chief minister following the BJP’s landslide victory in Uttar Pradesh (at least in seats, if not in vote share), belies the optimistic view that ideology has been a means to the end of material progress. Instead, it appears that economic progress is but one prong of a particular nationalist agenda.

Living in Trumpland, the perils of exclusionary visions of national identity are painfully obvious. However, one has to still grapple with the specifics of economic policy, and how to achieve rapid and inclusive growth. In fact, if the United States had done that somewhat better than it did, the election outcome might have been different. In the Indian case, the imperatives are even greater, and one can keep hoping that economic progress will not only not come at the cost of social inclusiveness, but that it will enable greater pluralism and diversity. Of course, the pro-market versus pro-business trade-off can matter here, but there may be room for a middle-path as well.

The 2017 OECD Economic Survey of India can be read in the context of the preceding paragraphs of this column. The main report is fairly innocuous and perhaps even standard in it prescriptions for improvements in monetary and fiscal policy, infrastructure, improving the business environment, financial sector development, and so on. Nevertheless, the clarity of presentation and an abundance of graphics make it a useful complement to the Indian government’s own, much more comprehensive Economic Survey.

From my perspective, the real interest of the OECD document is in one of the thematic chapters, on income and property taxes. (The other, on regional disparities, is also of interest, but a topic for another column). With the GST finally close to reality, it makes sense to turn attention to these other sources of government revenue. The chapter heading refers to making these taxes more growth-friendly and redistributive, precisely seeking the middle-path. The overarching need to better fund infrastructure and public services, as well as merit goods such as education, makes this a pressing need. And by focusing on ameliorating the government budget constraint, it sidesteps, to some extent, the issue of the precise development strategy India should pursue (though that is implicit in the main report).

A key point made up front is that India would do better by raising proportionately more tax revenue from income and property taxes versus sales taxes. For both corporate and personal income taxes, the point is made that the tax bases are narrower than they need to be, and that exemptions favour the better-off. A simpler, broader-based system would also make tax administration easier, less discretionary, and less threatening. As M Govinda Rao and I have argued for more than a decade, greater tax autonomy for state and local governments would create better incentives for public service delivery. Detailed discussions of property taxes, corporate and personal income taxes, taxation of foreign investors, and tax concessions for special economic zones or for infrastructure and research and development, all receive careful treatment in the chapter, in an integrated manner. There is also a good summary of a long-running issue, that of improving the quality of tax administration.

What does any of this have to do with the Uttar Pradesh election and its aftermath? My point is that the battle for India’s economic development will be won on this playing field, of careful technical analysis guided by well-understood economic principles. The game of winning political support, especially when played by using rhetoric that attacks and marginalises certain groups within a nation, is not necessary for achieving economic progress—indeed, it will be counterproductive in the longer run. Donald Trump is struggling with this realisation, and his response so far has been to double down on his divisiveness, and retreat further from reality. His party, meanwhile has no interest in the swing voters that elected him. India’s situation has many differences, of course, but there are parallels, and it remains to be seen how the government will craft economic policy over the next few years.

The author is professor of economics,
University of California, Santa Cruz

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