Jul 25, 2008

Taxing your brains...

Warning: Long, really long, and slightly academic post. Expect no PJs. Expect no sarcasm. In short, read it like you are going to watch a Bollywood movie.


Long time readers of the blog would know that the author hates paying taxes and is vaguely skeptical about the market mechanism’s ability to solve many problems. Long time readers would also know that the author has the unfortunate habit of thinking in wayward directions and writing posts that don’t make much sense.

The author tries his hand at attempting more of the same… trying his hand at coming up with some fundae while he really doesn’t understand the complex concepts involved.
Last week, while I was trying to file my taxes and cribbing about the colossal waste of money, an idea struck. I am not claiming it is original, but I strongly claim that I haven’t plagiarized anything.

How would it be if I, as a tax payer, am given power to decide how my taxes should be spent? As in, after computing my tax for the year, instead of paying the amount directly to the tax department, I am presented with an opportunity to direct my tax payments to utilities which would provide me the services that I think are important.

Some immediate advantages come to mind:
Collection Efficiency:
The current tax system involves first collecting large sums of money, pooling it at the Centre, and then some wise guys planning on how to blow up the money by allocating the pool to different states. So, first money travels from my pocket, to a Central authority, who then distributes it to a multitude of agencies for providing services. Leakages occur on both the collection and the re-distribution of the money. Wouldn’t it be more efficient if I pay the money directly to the agency which is going to spend it to provide me the services I need?

More efficient allocation of resources:
Economics is all about unlimited wants, and limited resources and prioritizing wants so that the resources can be allotted to the most pressing need. Economics is also about measuring empirically the wants of rational human beings. Empirical measurement means that while I may sit and dream about owning a Ferrari, and millions of my fellow humans may do the same, it does not mean that the Ferrari plant manager will say “The whole world loves our cars. Let us make billions of it”. No, it is about putting my money where my mouth is.

So, while people might ask for better roads, stable power supply, clean drinking water and good medical facilities all at the same time, the reality of limited resources means they won’t be able to satisfy all these wants at one go. So, we force them to choose which their most pressing need is, and hope that as rational human beings, they choose their important problem to be solved first. Plus, we ask them to stick to their choices in the sense they should commit their money to it.

Now, since the world believes that market forces of demand and supply are more efficient at allocating resources than a centrally planned authority sitting at deciding who is allowed to produce how much, shouldn’t the power of market be allowed to decide which services need to be provided? If the villagers believe that they need a hospital and not 24 hour power supply for the time being, why should some minister sitting at Delhi decide to go for rural electrification instead of rural health? The added benefit is that politicians can no longer go and promise ‘bijli, sadak, pani’ for votes, considering that people would get the services they want by allocating money for it.

More accountability and efficiency in providing the services:
Competition is supposed to make the providers of goods and services more efficient than a monopolist market. Most utility providers are inefficient because they get their budgetary allocation irrespective of their performance. So, when you force service providers to compete with one another for resources, they might become more efficient in providing the service. A road laying utility would know that unless it promises good roads and proves that it can maintain them in good condition, the tax payers won’t allocate money to it, and may instead spend it on water pipelines instead. Or some such competing service. You get the general idea.
Again, since the tax payers know which agency has got how much money to provide what service, they can make it accountable. Hopefully, such a system would make citizens more ‘activist’ but then, since this is India, I am not betting on it.

Now we come to the negatives of such a system:
The ‘Bottom of the Pyramid’ problem:
The age-old argument against free market forces. If rich people are going to pay taxes, and have a say on how it is going to be allocated, it might be expected that more money would be spent building a tree-lined, concrete paved promenade at Marine Drive than building a hospital in rural UP or an irrigation pipeline in Vidharba.

The ‘Missing the Big Picture’ problem:
Human nature indicates that immediate concerns get magnified while larger, distant concerns are shrugged off. Allowing citizens the choice of directing their tax money might lead to roads in localities getting re-laid at the sight of the first pothole (everyday traffic problems, immediate problem for urban citizens), while defence forces (security of the country, a distant problem for people not living in troubled areas) may not get any money. Considering the experience of housing societies in Mumbai, where interiors of every house is impeccably done while the decade-old paint on the society walls peels away, it might be said that issues which affect the nation at large may get neglected while money is directed to issues that address a small cluster of influential groups.

The “Neither Here nor There” problem:
What happens when there are two competing projects, say electric supply versus better roads, and half the citizens are for the first while half are for the rest. While earlier, at least one project was getting complete, now, both projects will have partial funds and neither will start. Considering the widely held belief that if you put three Indians in a room, you get five opinions, this cannot be ruled out.
The situation is further compounded by the problem that while 80% of the people may want electric supply, 20% of the people may contribute higher taxes and ask for better roads. Then, this reverts to the Bottom of the Pyramid problem.

Of course, some of these can be alleviated by allowing the tax payers to allocate a portion of their money to schemes/services of their choice while collecting some in a common pool. And getting the wise men from planning committees to decide on how to use the common pool money.

The ‘Did You Really Pay Up?’ problem:
Then there is a problem of monitoring the payments in a decentralized manner. If there is not enough ‘near real time’ information, what is to prevent a dishonest citizen from claiming that he has paid utility XYZ without actually coughing up the money? Suppose a person’s tax liability is rupees one lakh, and he claims to have paid ten thousand at ten different utilities, who is going to run around checking whether he has done so?

But considering that there is a system of claiming deductions for charitable contributions by producing a receipt, the same can be extended to utilities issuing a receipt for the amount that a person contributes to them. Add the fact that a dishonest citizen can cheat the system no matter what, and it really doesn’t make much of a difference.
So, would such a system work? Or will we revert back to a system where only those who paid taxes had a vote, and defeat the very principle of universal suffrage, on which our democracy proudly stands? Will such a system deny the poor the only right they have, that of ‘collective voting’ and lobbying the political system to provide them some meager benefits.

I am still wondering…

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