After formation of new government in India
people are expecting from the new Government that it will initiate a stream of
development and higher rate of economic growth will be achieved. New production policy and technology will be
promoted and it will increase production rapidly. New job opportunities will be
created and there will be jobs for skilled and unskilled both. Equal
opportunities will be generated to grow ourselves and economic and social
imbalance will be reduced. Corruption in government departments will be over
and ‘Coalgate’, 2G, 3G and such other scams will not be repeated. Indian
economy will be stronger in the world and it is also expected that new
Government will bring flood of economic reforms.
Most Asian countries have
experienced higher growth rate in past two decades but mostly bypassing the
poor section of the society. The growth rate has been uneven and often
accompanied by income inequality. Gap between rich and poor leads to unbalanced
social development.
In India not only development is
necessary it requires inclusive development. Inclusive development advances
equitable opportunities for economic participants during the process of
economic growth with benefits availed by every section of society. Sustainable
economic growth requires inclusive growth. The inclusive growth approach takes
a longer term perspective as the focus is on productive employment as a mean of
increasing the income of poor and excluded groups and raising their standard of
living. (en.wikipedia.org/wiki/inclusive_growth) Rapid and sustained poverty
reduction requires inclusive growth that allows people to contribute and
participate in benefits from economic growth. Rapid pace of growth is
unquestionably necessary for substantial poverty reduction but for this growth
to be sustainable in the long run, it should be broad based across sectors and
inclusive of the large part of the country’s labour force.
But the main problem is what are
those steps which will help to create inclusive growth, what will be the
efforts which generate equal opportunities for everyone. In this concern we
find that tax reforms would be an impressive act.
Tax
Structure—A Comparative Analysis
In
India when we discuss about taxation system we find that our tax structure is
very complicated and direct taxes are the main source of Government revenue. Such
taxes are paid by an individual or organization to the imposing authority. A
taxpayer pays direct tax to a Government for different purposes. The world has
moved now again towards indirect taxation.
In
2010-2011 the gross tax collection of the centre in India amounted to Rs. 7.92
trillion with direct tax and indirect taxes contributing 56% and 44%
respectively. But these direct taxes affect the productive efforts of general
public badly. The taxation system in India has strong traditional
overdependence on direct taxes as different from the new trend of orientation
towards indirect taxes all over the world. Direct taxes are the main part of
public revenue which affect people badly. Personal income tax is a penal tax on
honesty which falls heavily on the salaried employees and middle class.
If we compare Indian taxation
system with developed countries like America and China we find that the share
of direct taxes is relatively large in total revenue as personal Income tax 21%
and corporate income 35% in the central revenues (Economic Survey, 2013-14) and
it reflects the dominance of direct taxes in our taxation system. In this
concern when we go deep in the tax structure system of America we find that the
part of direct taxes is relatively small. In its total tax revenue part of
corporate tax is 21% and income tax is 12%. In case of neighboring China which
is more suitable for comparison income tax 7.21% enterprise income tax 17.48%, income
tax on enterprise with foreign investment and foreign enterprises 4.42%, house
property tax 1.30%. It is discernible from Figure 1. Furthermore in India the role
of direct taxes has been directly and indirectly increasing day by day.
Current
tax administration in India fuels many problems in taxation system. The
complexity of tax laws, the discretionary powers of tax officials, the low
amount and deterrence of punishment are only a few factors which create
opportunities for corruption in revenue administration. The effect of fiscal
corruption are wide spread as large amount of a nations taxable revenue are
unaccounted for voluntary compliance with tax law and regulation is reduced and
the distributive function of tax collection is itself undermined.
Among these problems and
difficulties land value tax could be a better option. It may be a panacea for
our taxation system and it may give new direction to Indian economy.
Taxation
and Inclusive Property Rights
Although
he economic efficiency of a land value tax has been established knowledge since
Adam Smith; (Smith Adam, 1776) Land value tax was perhaps most famously
promoted by Sir Henry George, in his magnum opus ‘Progress and Poverty:
An Inquiry into the Cause of Industrial Depressions and of Increase of Want
with Increase of Wealth’. He championed the cause of commons in the 19th
century through his original approach of inclusive property rights. Georgean
analysis on distribution of wealth
starts with three dimensions of land,
capital and labour and converges into two dimensions of land on the one side
and labour and capital on the other side finally leading to a win-win solution.
According
to Henry George, labour and capital have usually been put in quite opposing
positions relegating landowners to the background for preparing a base for
trade cycles through land speculation in collusion with exploitative capital.
But this leads to wasteful exclusive property rights in favor of landowners
with appropriation of all surplus as rent after paying minimum level of wages
and interest. This surplus as rent is in addition to high speculative land
value—both unearned whereas productive and exchange efforts with the help of labor
and capital are subjected to all sorts of direct & indirect taxation.
Land
which is a free gift of nature for the whole humanity has been subjected to
monopolization through exclusive private property rights laws, wars, freehold
leases and so on. In this way, George and Drake (2006, p. 127) feel, ‘….labor
and capital do not have opposing interests, as is popularly believed. In
reality, the struggle is between labor and capital, on one side, and
landownership on the other.’
George
argued as when the site or location value of land was improved by public work,
its economic rent was the most logical source of public revenue. (George, 1879)
The land value of the site is also directly related to its demandable ground
rent which is potential for use in either production or capacities.
Nature
of Land Value Tax
A land value tax is a levy on unimproved
value of land only. It is an ad valorem tax on land that disregards the value
of building personal property and other improvements. A land value tax is
different from property tax which is taxes on the whole value of real estate,
combination of land building and improvements to the site.
(en-wikipedia.org/wiki/Land-value-tax) A land value tax is also a progressive
tax in that it would be paid by the wealthy and reduce economic ineqality. (
Suit,
1977)
The supply of land is inelastic market. Land rent depends on what tenants are
prepared to pay rather than on the expenses of landlord and so LVT cannot be
directly passed on tenants. (Smith Adam, 1776) The direct beneficiaries of incremental
improvement to the surrounding neighborhood by others would be the land
occupants and absentee landlord would benefit only by virtue of price and
competition among present and prospective tenants for those incremental
benefits. The only direct effect of LVT on price in this case is to lower the
unearned increments. (McCluskey and Franzsen, 2005)
LVT encourages land owners to
develop vacant and under used land property or to make way for others who will
want to actually used it. LVT defers speculative land holding as dilapidated
inner city areas are returned to productive use reducing the pressure to build
on undeveloped site and so reducing urban sprawl. LVT is assessed using market
evidence. Such evidence may comprise both selling price and rentals. Where
development already exists on site the value of site can be discovered by
various means of which the most easily understood is the residential value. The
value of the site is the total value of the property minus the depreciated value
of building and other structures.
Secondly, when compared to
modernly property tax valuation of land involves fewer variables and has
smoother gradients than valuation that include improvement. This is due to
variation of building style quality and size between lots.
Modern LVT system is alongside
other taxes and thus only reduces their impact without removing then
completely. In a case or event where a jurisdiction attempted to levy tax that
was higher than the entire land owner surplus. It would result in landowner
abandonment and a sharp decline in tax.
Milton
Friedman (http://www.wealthandwant.com/themes/Friedman.html
accessed November 14, 2010.) himself agrees with Henry George that his land
tax is potentially beneficial because unlike other taxes, land taxes do not
impose an excess burden on the economy, and thus stimulate more rapid economic
growth. Herbert A. Simon (2010) in his Autobiography also extends his support
to George’s approach to taxation. From Paul Samuelson to Joseph Stiglitz, it
has many supporters in the economists’ fraternity. (Singh, 2014) In an open
letter to the then Russian President Mikhail Gorbachev at the very start of Perestroika,
signed by 30 noted American & European economists on November 7, 1990
including four Nobel economists—Franco Modigliani, James Tobin, Robert Solow
and William Vickrey had expressed their joint support to this approach and
persuaded Gorbachev not to blindly adopt features of their economies that keep
them from being as prosperous as they might be and emphasized social collection
of the rent of land and natural resources. They mentioned,
‘It is important that the rent of
land be retained as a source of government revenue. While the governments of
developed nations with market economies collect some of the rent of land in
taxes, they do not collect nearly as much as they could, and they therefore
make unnecessarily great use of taxes that impede their economies — taxes on
such things as incomes, sales and the value of capital……Users of land should
not be allowed to acquire rights of indefinite duration for single payments.
For efficiency, for adequate revenue and for justice, every user of land should
be required to make an annual payment to the local government, equal to the
current rental value of the land that he or she prevents others from using.’
(the complete letter is available on www.wealthandwant.com)
The contents of this concise letter provide a good policy direction to any
economy in transition as are the current economies of the Eastern Europe.
Modern-day environmentalists have agreed with the
Georgist idea of the earth as the common property of humanity – and some have
endorsed the idea of ecological tax reform, including substantial taxes or fees
on pollution as a replacement for "command and control" regulation.
Though George’s
analysis is more than hundred years old, its modern version {passing through
modififications by Bob Drake, Robert Schalkenbach, Robert V.
Andelson, Michael Hudson, M. Mason Gaffney(2008), Fred Harrison, J. W. Smith
(2008) and the US based Institute for Economy Democracy(IED)} is more
interesting.
A land tax takes into account the effect a
land value of location or of improvement made to neighboring land such has
proximity to roads, public works or shopping complex. LVT is said to act as a
value capture tax. A new public works project may make adjacent land go up
considerably in value and thus with a tax on land values; the tax on adjacent
land goes up. Thus the new public improvement would be paid for by those most
benefitted by the new public improvements—those whose land value went up most.
(Rybeck,
2004). Thus, a land value tax would tax socially created wealth, allowing a
reduction in tax on privately created wealth. http//earth sharing.ca/page/poverty as
accessed on 13 September 2014 at 19:54.
LVT
and Dynamics of Progressive Socialism
But this
issue of LVT has better to go with certain non-extreme balancing
considerations. Progressive socialism as propounded by P. R. Sarkar since 1958
advocates the abolition of income tax on productive efforts or earned incomes
but it maintains support to plurality of taxes rather than quite risky dependence on
single tax base. In his model (progressive
socialist) of developmental planning P. R. Sarkar advocates the abolition of income tax on productive
efforts. (Sarkar, 1987) To him,
the tax system all over the world needs overhauling. In this way, both Sarkar and Stiglitz
favor a moderate, wider and less risky system which eliminates any taxation on
earned income but keeps adequate options open for indirect taxation including
that on land.
Our taxation system is quite archaic,
inefficient and in reality highly regressive for honest or middle class. In
fact, personal income tax (PIT) is a penal tax on honesty which falls heavily
on the salaried middle class. That is why many thinkers like P. R. Sarkar,
Henry George, Prof. Ravi Batra and even Nobel Economists like Milton Friedman
(US Economists) have been opposing PIT as inefficient, unnecessary and
counterproductive. They want it to be replaced by a system of Land Value
Taxation (LVT), i.e., annual tax on land according to locational or circle
value of land. Same tax whether land is vacant or under heavy use. It will
check hoarding & speculation in land and to some extent in property and
force landholders to use land efficiently as has been the experience in Hong
Kong, China, Taiwan, Australia, New Zealand, South Africa, Norway, Singapore,
Estonia, Pennsylvania state and many cities of USA.
Hong Kong is
perhaps the best example of the successful implementation of a high land value
tax. A whole country on lease for 99 years before transfer to China has shown
that how an economy can be highly prosperous, stable and happy with land value
rental system. The Hong Kong government generates more than 45% of its revenue
from land taxes, and keeps its other tax rates low. (Pilling,
2011) Even China's Real Rights Law contains fundamental provisions founded on a
land value taxation analysis. (http://www.landandliberty.net/)
Tax on land (even on benami land) cannot
be avoided. The eight Gulf countries like UAE, Qatar, Oman, etc. have no income
tax at all. Crude Oil and other minerals & their mines in these eight Gulf
countries are treated as part of land as a natural resource. Rather than
outrightly selling them these oil nations use rentals on them as an annual
revenue generating source on the same pattern of LVT. After all they are not
fools. The same applies to 2G or 3G spectrum or other natural resources. Hong Kong (an economy on lease until
1999 with no permanent land holding) and Singapore, former British colonies
with a history of recovering the socially-generated value of land, are the two
most orderly (usually), prosperous, and geonomic jurisdictions on the planet. (Smith, 2011) The very success of these economies is a
strong reply to those who ridiculed them as ‘casino’ economies. Accepting the
position of P R Sarkar and Joseph Stiglitz is quite feasible particularly.
George has also shown
repeatedly his clear preference for smooth transition over violent change. The
tax rates (of income, expenditure, customs, excise, etc.) also must be kept within 4 to 10 percent and
not more than 15 percent even for any emergent funding requirement as the
temptation for avoidance rises with higher rates leading to maladies of
parallel economy, hoarding, smuggling, black money and marketing leading to
adverse impact on tax collection, compliance and buoyancy. After all taxation shouldn’t prove penalty
for honesty.
Conclusion
In India today, if
income tax is abolished and excise duty on excisable commodities is increased marginally
in addition to realizations from a relatively new source of LVT, there will be
no loss of government revenue. No income tax, nobody will try to
accumulate black money. All money will be white money. As a result there will
be no temptation of hiding money in foreign banks. The approach of the Indian
Government so far has been as either to first impose heavy taxes (quite
lucrative to powerful tax evaders) and then launch some amnesty scheme for
declaration of black money or to let black money first outfly to Swiss banks or
other hidden foreign destinations and then make tall but misleading promises to
bring that money back home—which is more an opportunity full of warning to tax
evaders to divert this money elsewhere before the Indian Government starts any
serious action. The recent media reports of large money withdrawals from Swiss
banks (the position of Indian accounts not being clear) before the new
government in India could initiate any action proves hollowness of such
policies. (PriceWaterhouseCoopers,
2014), (Ray and Mishra, 2010)The Real Estate is infamous for
"Buy Dirty, Sell Clean".
Supporting
application of this novel approach in India, journalist Navin Singh (2014)
writes, ‘It will end speculative land hoarding and bring down prices for the
end-user…It will free a lot of undeveloped land close to cities, which can be
developed by state or private players….This will provide the government
revenues to develop urban infrastructure. Mining companies, which find it more
profitable to squat on natural reserves sensing a rise in mineral prices,…will
have to mine it to earn revenue to pay tax, or choose to return it to the
government. Unused prime urban land, of closed mills for example, will be
promptly returned to the government for the same reason.’
The new measures of taxation as suggested above
will also lead to economic solidarity, an increase in trade and commerce, more
investment, more employment and an improvement in the position of foreign
exchange due to no outflow of unaccounted hidden money. Intellectuals should
demand the abolition of income tax.
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