Tax policy : Time to remove outdated elements
The ideology of direct taxation has changed with times. Fashions in this area come and go. What was regarded as good fiscal wisdom 100 years ago is now discarded. In an article on income-tax published in the Encyclopaedia Britannica around 1846, its author said that income tax was an unpractical levy and could not be imposed successfully. But income tax today is an inescapable reality of our life.
The rational of taxation is broadly based on three basic considerations — to raise revenue, to bring about certain economic and social results, and to discourage the consumption and use of articles which the state regards as obnoxious. Most taxes fulfil the first consideration. The second is achieved by taxes like income tax, wealth tax and state duty, which try to reduce disparity between wealth and poverty. The third task is served by taxes like those on liquor, tobacco, etc. In a famous dictum, Napoleon regards vices as good patriots. The love of brandy brought him five million francs a year, and he wanted to know which virtue contributed so generously to state exchequer.
Adam Smith in The Wealth of Nations pointed out that four main objectives should be borne in mind by the state levying taxes. First, equity: the taxes must be equitable and fair to different classes of society. Second, convenience of the tax payer: taxes must not be so complicated and cumbersome as to cause inconvenience and hardship to the people. In Nepal, this objective has been overlooked by the government. Third, economy: the government must levy only minimum taxes. Fourth, certainty and clarity: laws on taxes must be precise and clearly worded so as to make the tax payer understand what exactly is the burden he is called upon to bear.
The canons of taxation in modern times have been stated to be social justice, consistency with economic goals, ease of administration and compliance, and revenue adequacy. Social justice is, beyond doubt, the most important goal of taxation. But the main problem facing the underdeveloped countries is reconciling the objectives of social justice with the need to provide fiscal stimulus to promote economic goals.
Income tax is of three types — (a) progressive tax where the rate increases with the higher slabs of income; (b) proportional, where the rate remains constant at all levels of income; and (c) regressive, i.e. the rate comes down as you approach higher slabs of income. Progressive taxation is a fact, proportional taxation is a theory, and regressive taxation is only a dream. Great modern thinkers on economics have supported progressive taxation as the only mode of achieving the democratic ideal of social justice.
In January 1963, John F Kennedy, realising the self-defeating consequences of excessive taxation, proposed a bold measure of tax reform and the bill was passed by the Congress after his death. As expected, the tax cuts had a galvanising effect on the national economy and increased the US revenue substantially.
The old-fashioned fiscal theory that tax rates must be increased to provide larger revenues for the country proved wrong long ago but Nepal continues to cling to it. Fiscal policy pursued by the most progressive countries is to make revenues grow, not by increasing tax rates but by making incomes grow and enlarging tax base. In other words, tax revenues must be made self-generating. Nations in the shadow of defeat and disaster, with their economy in tatters, have awakened to the possibilities of modern fiscal policy and have already enjoyed its fruits.
No doubt, rewards must be shared, but first they have to be earned, wealth must be distributed, but first it has to be created. Only good management and hard work can accomplish this end. However, the government’s function is to offer incentives and create conducive climate where these qualities will be applied.
Our tax policies suffer from five patent defects which can be easily remedied but which the government has so far resolutely refused to tackle: (a) absolute uncertainty: frequent and unpredictable changes in laws and tax rates; (b) complexity which verges on the incomprehensible; (c) excessive financial burden which makes dishonesty more rewarding than integrity and hard work; (d) injustices inherent in fatuous laws and arbitrary provisions which are not based on any discernible principle of legislation or taxation and; e) an administration marked by petrifaction of discretion and paralysis of the will to do justice.
With growing population, rising prices and the mounting unemployment, the answer can only be greater production and a wider industrial base. It would hardly be an exaggeration to say the future of democracy in Nepal depends upon higher production, both in the fields and in the factories. The requisite increase in the GNP is almost unthinkable under the present devastating burden of taxation.
Dr Nepal teaches Economics at TU