Taxation is one of the major tools used by governments in a mixed economy. It mainly works as a source for government funds and government spending. Now there’s more to why the government takes on the responsibility to make certain investments but thats a a completely different “road” which we are not catching in this paper.
Getting back to the core idea of taxation, India currently has a very complex and intricate system of taxation which possibly covers every aspect of business operations and incomes in India. On a basic level though, a rate of 30% income tax is levied on individuals with incomes exceeding Rs. 8,00,000 p.a.. On the other hand, companies are liable to a flat rate of 30% income tax irrespective of their incomes. Again, this is taxes just on a basic level. The CBDT and Finance Mistry issues an exhaustive document on exemptions and the kinds of income which are actually subjected to taxation.
Tax (Photo credit: 401(K) 2012)
Inflationary Tax Policy is just a conceptual idea that popped up in the little brain of mine a few days back. Hence I might be completely wrong and the whole idea might just be a falsified approach but hey, its not easy to build a taxation policy in a couple of days anyways.
Inflation is nothing but an increase in the price levels of an economy. This will form the base of what I am going to build upon from now. By now we also know that taxation in itself only involves transfer of money from us to the government of India. Hence any taxation policy should be able to achieve the above aspect to hold valid.
Inflationary Tax Policy is just another way to transfer a definite amount of money form the individuals to the government in a way that nullifies the hassles and possibilities of escaping taxation. Now what exactly happens is that instead of charging individuals directly by asking them to file returns we do it in a different way. This different way is by making the value of their money lesser by exactly the same percentage as the rate of tax. How are we supposed to do that? Inflation is the answer. Hence if we could explicitly induce inflation into the economy, we will easily be able to decrease the value of money held by every individual in the whole economy. Hence this way we take the money from the individuals and take it in such a way that they don’t really have any control over escaping taxation by declaring a lesser income than they they have actually earned as every currency note has lost a bit of its value. Hence for instance, if the induced inflation was 30%, price levels increase by 30% effectively decreasing the real value of money by 30%. If we notice carefully we have already extracted a specific amount of cash from the individuals. Now we need to find a way to remit this to the government.
If you recall, we have been using the term “induced inflation” but I haven’t really proposed a way to do that. That’s exactly what I am going to do now. Inflation can broadly be classified into two distinct categories namely; Cost Push Inflation and Demand Pull Inflation. I am going to deal with demand pull inflation which happens when the aggregate demand increases leading to higher prices. Now if we increase money supply, interest rates drop which will provide an incentive for investment and aggregate demand will increase leading to demand pull inflation. This is called monetary inflation and this is precisely how remitting money to the government will take place. At the end of the fiscal year, the government can print a specific amount of currency notes and treat it as tax revenue. Once this happens, the government ultimately gets the money required by them and the individuals too have lost a part of their incomes.
If we see the bigger picture we have done what taxation does currently. But their are some key loopholes that I identified in this study. Firstly, adopting such a system would leading to a very high fluctuations in the prices of every products. Hence approximately every product will sell 30% more if thats the tax rate prevalent in the economy. This can obviously cause a lot of confusion between the individuals in the economy and adjusting to such changes can also become hectic. Secondly, if such a practice continues inflation might become uncontrollable after a certain point of time reaching very higher levels. This may have some serious impacts on the economy. Thirdly, it will not be a sustainable policy where progressive taxation is a big requirement especially in developing countries. Hence government will not be able to introduce any exemptions and relief to certain parts of the society. Only way possible would be to remit the money back by providing subsidies based on income to reduce the affect of induced inflation. Hence if an individual was liable to 10% tax only he could be asked to file return and now instead of charging him, he his given the excess tax charged (20%) back. Although, by adopting this the individual wouldn’t want keep any black money as it would only work to his disadvantage.
So this is it. I am not sure if you found this idea interesting or stupid but its just something I wanted to share. It’s just another approach to taxation. I am always open to critical comments.
Also, have a nice day……
EcoDig 