Income Tax

“The hardest thing in the world to understand is the Income Tax.” – Albert Einstein

“Income tax has created more criminals than any other single Act of the Government.” – Barry Goldwater

“Income tax returns are the most imaginative fiction being written today.” – Harman Wouk

“They can’t collect legal taxes from illegal money.” – Al Capone

The roots of tax on income can perhaps be traced to 1798 when the British monarch claimed a divine right to a part of the citizen’s income/ revenue. This was extended to India in 1860, after the British Crown took over the overt rule of the Country from the East India Company in 1858.

In 1913, the United State government found it easier to collect tax from the entrepreneurs who generated great wealth in the oil, railways and other industrial enterprises and who even traded their equity on the stock markets, than from the farmers spread across the Country unless they came to the large markets for sale. Tax on income was a matter of greater convenience in that context and thus a systematic Income Tax was introduced.

We should also note that the Federal Bank of USA, was set up by a group of Private Banks, and the Federal Reserve Banks of various States, themselves also set-up by other private Banks ostensibly under the control of the Federal Reserve Board in Washington, but in reality, controlled by the many Foundations of the super-rich families such as Rockefeller, Ford, Rothchild’s, and others that were also set up in 1913, and which controlled the Banks. What is more important to note is that Great World War started soon thereafter in 1914. This is not a coincidence.

Soon after, other countries began to follow suit and imposed I.T. and it began to be considered the best way to tax the new wealth creators, not recognizing that it was inequitable, unreasonable and actually discouraged the wealth creators who soon began to find ways to evade tax and hide their ‘Black Money’ elsewhere and use it more for consumption than for productive investments.

Steven E. Landsburg, in ‘The Big Questions,’ encourages us to view issues of economic and social justice from a different perspective to seek – “for something reasonably simple and internally consistent, but above all for something that conforms to our most powerful moral instincts.“

He calls on you to imagine being a parent at a playground and ask yourself what the right behaviour should be in situations that arise there and determine what is right or fair, after all -”when it comes to distinguishing good from bad behaviour, every parent is an expert”. for e.g.: At a playground, if someone else’s child has more toys then your child has – would you think it fair or right to tell your child to, or yourself, take away from that child and keep or give to others? Of course you wouldn’t. It would amount to stealing. You may seek to encourage sharing by cajoling or bargaining, or more often, you may only seek to teach your child to cope with inequality and selfishness that exists everywhere.

So why is it that as an adult, you have no compunction in calling on the Government to do your stealing for you and voting for that politician who talks about a more progressive tax code that spreads the wealth more equally and so forth, – from the rich who have too much, to the poor who have too little? Forcible expropriation is simply stealing and no legitimate government can morally be given the authority to do your stealing for you.

A tax that falls only on a very few and leaves the many untaxed is unfair. Also, a tax regime that seeks a higher percentage share of income from some than from others is inherently unjust. It must be recognized that a fixed percentage from all is in itself inherently progressive when the actual amounts paid as Tax are considered – 10 percent of Rs. 10,000/- taxable income is only Rs. 1,000/- but 10 percent of Rs.10,00,000/- taxable income is Rs. 100,000/-, clearly the rich do pay more.

Today we, in India, have a greatly distorted and inequitable system of ‘Direct’ taxation. Income tax is paid by about three percent of the adult pop ulation, as against 45 to 70 percent in other countries, but the rates and terms applicable are voted by all, through their representatives. Thus, is patently not equitable. The slight increase in the number of tax payers, after demonetization and the implementation of GST does not in any meaningful way affect the validity of the argument. Also, as agricultural income, a State subject, is exempted, it is not realistic to now expect the States to legislate against the interests of their own Legislators and bring Agricultural income under the I.T. Act.

Even of this low base of income tax payers, over two thirds are Government or Public sector employees from whom the Government only transfers money from one pocket to another pocket by increasing their emoluments. The income tax collected from the balance less than one percent private citizens and corporates is estimated to be far less than the costs of collection and enforcement, the interest and depreciation on the capital costs of the assets of the I.T. Department taken at market value, and remuneration, perks and pensions of its personnel, and the costs of its litigations and consultancy etc. Hence, the IT Department should be recognized as a net revenue loss to the Government. Thus, making a strong case, justifying doing away with the I.T. altogether, especially since the GST regime has come into operation and which can easily be made simpler in operation and more comprehensive in coverage.

This will also, eradicate the concept of ‘Black money and the attitude of perceiving the entrepreneurs, businessmen and industrialists as money grabbing crooks, instead of real wealth creators.

In an environment in which we now seek to encourage wealth creation, taxing such wealth creators would be self-defeating and also, a kind of double taxation, as spending such wealth also, attracts taxation under a comprehensive GST regime. Such taxation would soon drive the Entrepreneurs out of the Country to more favourable climes. Records show that in the last few years over 5,000 Indians, who have become US$ millionaires leave India every year because of the high tax rates and the complex regulatory regime here. This would be disastrous for the rest remaining in the Country. We need to encourage such wealth creators to remain here and create wealth here. (See -Annexure-1 – The story of the Ants and the Grasshoppers).

After all, income is not just salary received by employees / workers, but also, the wealth, created by entrepreneurs who take the risk of failure. We therefore need to find a more equitable and not too burdensome, but almost self-regulating and enforcing way of collecting tax revenues.

That I.T. is the mainstay of a Taxation system, is not a policy carved in stone and as it is neither universal or comprehensive or equitable, we should seek for a better system.

Doing away with I.T. is really a necessity, however, as this will require a Parliamentary Act that will take time, it may be preferable to reduce the I.T. rate to ‘zero’ at once and after a review over say three years, the Act can then be removed through the Parliament. All pending disputes can be directed to be mandatorily settled within say six months to a year with the benefit of doubt being given to the assesses.

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