Opinion The importance of pleasing Sonia Gandhi

But let us examine the logic and facts behind Chidambaram’s bold proposal. He wants more inclusive growth — yawn,who doesn’t? Just to make sure Sonia Gandhi remains within earshot,he even more boldly declared that poverty must decline faster than the 1 percentage per annum rate. Yawn again. But what do these platitudes have to do with raising the tax rates on the rich? Oh,the European rich are saying “please tax us more” (even the Italians?),so why can’t the Indian rich say the same?

The minister has done his maths. We need to tax the rich more because direct income tax revenues have been buoyant. Over the last five years (2006-07 to budgeted 2011-12),income tax collections have doubled from about Rs 85,000 crore to Rs 172,000 crore. It would be nice if,with a magic “dream” wand,one could just add a few thousand crores more — only to help the government spend more on the poor. Just the other day,Chidambaram was arguing about “outlays and outcomes” and how the need of the hour was to improve the efficacy of government spending — much more than Rs 15 out of every Rs 100 must reach the poor,he had thundered. But then he was a popular and secure finance minister in 2006.

It would be useful for Chidambaram,and all of us,to know who is paying how much tax in order to find out why a soak-the-rich policy would be a good idea. Some time back,in 2002,Vijay Kelkar’s taskforce on direct tax rates concluded that there was a “missing middle” among Indian taxpayers. In other words,while both the rich and the poor had high rates of tax compliance,the middle section of tax payers had very low rates. In other words,the maximum increases in tax revenues were not to be obtained from higher tax rates but better methods of compliance. This is also the conclusion of the Economist’s cover story in the September 24 issue. This story,entitled ‘Hunting the rich’ (and one possible source for Chidambaram’s newfound angst),concluded: “If the budget is a government’s primary concern,then the evidence is that reforms that close loopholes and broaden the tax base are a more efficient way to bring in more money than higher taxes for the rich”.

The missing middle results were for a decade ago and are quite possibly outdated. It is quite possible that there is no longer a missing middle,that indeed the tax rate can be raised with populist zeal and more revenue gained for UPA’s “inclusive growth”. In Chidambaram’s own words,“We must raise the tax revenue to defend (the expected aggregate decline of resources).” Sonia’s populism must continue. And money for this should come from higher tax rates on the rich and not the efficiency of government expenditures?

So what does the tax return data say about compliance in 2010? It doesn’t,it cannot,these data are no longer available. The last time the CAG published (spotty) data on tax returns was for the fiscal year 2006-07. In that year,there were 3.06 crore taxpayers and 6,00,000 individuals in the Chidambaram “rich” category (greater than Rs 10 lakh). Henceforth,all professors are rich by the gospel according to the UPA.

Since the report on 2006-07 tax collections,the CAG does not publish any distribution of tax data. Sources in the finance ministry assure me that even the policy makers do not have access to such data (RTI: please help). So let me see if you and I understand this correctly. When Chidambaram argues for higher tax rates,what is he indulging in — politics,populism,or wild dreams? He doesnot know,and what is worse,neither does the government. Is this how policy on one of the most important economic issues is made in India — without any data? Yes,because in India,no proof is required,for people who make policy and for those who want to make policy.

The writer is chairman of Oxus Investments,an emerging market advisory and fund management firm