DTC puncture

The most notable problem of this sort is in the acceptance of what is known as an exempt-exempt-exempt or EEE tax regime in which,for long-term savings instruments such as a provident funds, no taxes are imposed at any point: not at the initial time of saving,not when the funds youve saved are invested or reinvested,not even when the returns from those investments are withdrawn. The original and laudable attempt at simplification that the first DTC was supposed to bring in replaced the EEE with EET: where the first two steps wont trigger taxation,but withdrawing the money in order to spend it will cause you to be taxed. This was not only a simplification,but would have preserved the incentive to save (which enhances growth),while taxing the extra income when it is eventually transformed into consumption,when the growth-enhancing effect vanishes. That this has been taken out of the draft is disappointing. And it will result in higher tax rates all round.

Indeed,the entire approach to long-term investing shows a

certain unfortunate schizophrenia. Theres also the issue of the dilution of any difference in the incidence of taxation between long-term and short-term capital gains. This means that individual investors who choose to go in for the long term will suffer in comparison to institutional investors and we increase their incentives to think in the short-term rather than over longer,more value-driven horizons. It is certainly true that mutual funds,for example,are bulk movers of investment. Yet consider this: every time an individual adjusts their portfolio of shares,they might have to pay capital gains tax,but if theyd had a mutual fund doing it for them,the taxes wouldnt apply. The original purpose of this far-sighted reform was to make things easier for individuals to save,invest and pay their taxes. Is that purpose served by encouraging exemption-gaming,or by discouraging individual initiative?