T C A Srinivasa-Raghavan: The Robbing Hoods

There is no economic justification for the income tax. It is purely a political device, which is why governments love it

Ever since the Bharatiya Janata Party proposed a while ago that it would abolish the income tax, I have been reading up on the history of this utterly horrible and immoral tax. The first thing to strike you, should you also make a similar effort, is that it hasn't been around for forever, as some uninformed people like to pretend.

It also becomes apparent that if an inequity is practised long enough not only does the populace come to accept it as the norm it also begins to regard it as being justified. Indeed, an entire philosophy is developed by middle-class intellectuals, who always act against their class interests, that it is moral as well.

Paying income tax has thus become a virtuous act, never mind that you are voluntarily handing over your money to bandits. Governments, if you will, become Robbing Hoods.

Income tax first came into being only in the 10th century in China, but the Emperor who imposed it was deposed in short order after 13 years. There was much rejoicing in the streets, it seems.

The next time it was imposed was fully 800 years later in Britain to finance the wars against Napoleon. Once those were over, it was abolished in 1816.

It was re-introduced 35 years later and stayed on, first, because it was used by the British to disenfranchise the poor - no tax, no vote - and then, after they lost the Empire, to finance their defence, and finally since the late 1960s, to pay doles to the unemployed. The alternative, said the scaremongers, was Communism.

The US didn't start it till 1861, again to finance the civil war. It was repealed when the war ended in 1865 but re-imposed in 1894, as the first peacetime income tax. It, too, has stayed on for reasons more or less similar to those in Britain.

In India, it was introduced in 1860 because the Crown, which had taken over after 1857, wanted to teach the East India Company louts a lesson. But it was abolished in 1873, only to be reintroduced in 1886. It has stayed on since then.

Indeed, as far as poor countries go, India has been practising this form of inequity the longest, proving Dr Ashok Desai's dictum that when it comes to finding bad global precedents, India always triumphs.

A political tax
What the "good" people don't seem to understand is that a tax on income has always been a device to attain political ends rather than a device to attain economic ones. If you study the history of income tax in detail, you will find that when it was not being imposed to finance wars, it was imposed in order to meet some political agenda.

The 20th century, especially the latter half of it, saw a huge expansion of electoral democracy. This reinforced the political aspect of income tax. It was for this reason, for example, that Indira Gandhi in 1972 increased the marginal rate of taxation to 97 per cent!

Throughout this period, the income tax has been justified on the grounds that it helps the rich help the poor, never mind that it is at gunpoint. The truth, alas, is different.

Far from having any egalitarian outcome, it basically forces the productive parts of society to pay for the upkeep of those who contribute absolutely nothing to it. The state has replaced religious bodies (which received zakat, tithe, daan and so on) as the intermediary.

India's problem
Thanks to the economic policies followed by the Congress, India - instead of becoming a manufacturing economy where the mass of the people earn regular wages, salaries - has become a service-providing one. This in turn has meant a huge proliferation of self-employed individuals such as doctors, lawyers, architects, IT professionals and so on, you know, the Form 16A types.

Such people, in the eyes of the tax authorities, are simultaneously individuals and businesses. This has led to the creation of a separate entity that is taxed at the applicable rates to personal income tax but also, as businesses, allowed huge deductions for expenditure, which they cannot possibly incur years after year for 30 years if they are selling only the produce of their brains. What they earn is neither salary, nor profit; it is the classical Ricardian rent.

In order to avail of the facility of showing higher expenses, these people produce false or inflated bills. They also receive payments in cash. Voila! expenses go up and taxable income goes down.

Thus, it is income tax which is responsible for what is called "black" money, which is that portion of your income on which you have not handed over tax to the government. But if there were no income tax, there would be no black money, would there?

People ask: what should replace it? The answer is that if it is very hard to abolish it totally, reduce rates to five and 10 per cent and watch compliance improve.

The author will respond to comments on this column on Monday