As with many other problems in Indian economic reform, getting to the right destination on the GST requires winning on policy, politics and administration. On the policy side, the basic design of the GST needs to be done right. Pulling this off will require great political skill – a coalition of beneficiaries from the GST will need to champion it in the Indian federal setting. Finally, assuming that the policy and the politics has been done well, it will require the right plumbing. In this blog post, we review progress on this third element.
Done right, the GST ought to replace all existing indirect taxes. It should treat all goods and all services identically. It should be a
single administrative system covering tax payments to both Centre and States thus eliminating the compliance cost that is associated with dealing with multiple tax authorities. It should be globalisation-compatible: goods and services sold to non-residents would be fully refunded the entire burden of indirect taxation that has been incurred at all stages of production. India would then follow
the principle of not taxing non-residents.
These are powerful and important economic concepts. However, their translation into reality is critically about execution. In the case of the GST, as with the New Pension System, the problem of execution is substantially (though not entirely) a question about building large IT systems.
While much of the legal and policy framework around GST is still being worked on by the Central Government in consultation with States, some progress has been made on setting up the infrastructure for processing registration, returns, and payments in a standardised manner. A detailed note on the IT infrastructure for GST has been put up by the Ministry of Finance.
In terms of organisation structure, existing success stories include the Tax Information Network (TIN) and the New Pension System,
both of which are being managed by NSDL. A more general concept of ‘National Information Utilities’ (NIU) was proposed by the TAGUP Report. This report drew on the success of establishing market infrastructure institutions such as NSE and NSDL, and recommended that NIUs be such non-Government companies, with Central and State Governments as joint shareholders, dispersed shareholding among other institutions, avoiding shareholders that may have a conflict of interest, and avoiding listing on exchanges. In spirit, NIUs must have the efficiency of a private corporations, but be animated by a public purpose.
In the Budget Speech of 2012-13, the Finance Minister announced that a NIU for implementing the GST would be constructed. It would be called GSTN and would be fully operational by August 2012. The first steps towards constructing GSTN have now been taken, with a Cabinet approval for GSTN. The official press release on this says:
The Cabinet has approved a proposal to set up a Special Purpose
Vehicle (SPV) namely Goods and Services Tax Network SPV (GSTN SPV) to
create enabling environment for smooth introduction of Goods and
Services Tax (GST). GSTN SPV will provide IT infrastructure and
services to various stakeholders including the Centre and the States.
The GSTN SPV would be incorporated as a Section 25 (not-for-profit),
non-Government, private limited company in which the Government will
retain strategic control. It would have an equity capital of Rs. 10
crore, with the Centre and States having equal stakes of 24.5%
each. Non Government institutions would hold 51% equity. No single
institution would hold more that 10% equity, with the possibility of
one private institution holding a maximum of 21% equity.
GTSN SPV would have a self-sustaining revenue model, based on levy of
user charges on tax payers and tax authorities availing its
services. While the SPV’s services would be critical to actual rollout
of GST at a future date, it is also expected to render valuable
services to the Centre / State tax administrations prior to the GST
A somewhat strange myth has taken hold in some precincts of American conservative opinion that some vast swathe of the population isn’t paying taxes. In fact everyone pays sales taxes and other state and local taxes, and as Adam Looney and Michael Greenstone write for the Hamilton Project almost all working-age people pay federal tax on their income.
The main bloc of people who don’t pay income or payroll taxes are elderly people. Old people tend not to work, and many old people don’t have much in the way of investment income either. But it’s not like they’re freeloading, they’re just people who paid taxes in the past when they were working.
There are a couple of points worth making.
First, Yglesias is correct in noting that technically everyone pays taxes. Some taxes are direct, like fees for federal services, sales taxes, payroll taxes (which are generally only avoided by student workers, a handful of other workers, and the unemployed), and a few other taxes besides. Furthermore, everyone pays taxes indirectly, in the form of foregone goods and services. Corporate taxes are a perfect example of this, and some limited taxes (think: capital gains) also have indirect costs. Thus, to say that no one pays taxes is technically incorrect and highly misleading. If conservatives continue to say that there are a large number of people who don’t pay any taxes, they will find themselves facing political problems later.
Second, the more technically correct claim would be that there are large numbers of people who don’t have any income tax liability. This could mean that some people don’t earn enough to be charged taxes, it could mean that some people are able to claim enough deductions to avoid having to pay taxes, or it may be that someone is able to claim enough tax credits to negate their tax burden. Not having an income tax liability does not necessarily make one a parasite on the system, and given that a large number of current non-tax-payers have basically paid taxes for fifty or more years, painting them as lazy or as parasites, or as evidence that the system is on the verge of collapse is likely not going to go over very well politically.
Finally, the correct response to this issue should be two-fold. Conservatives should use this issue to argue for generally lower tax rates for all, in the name of fairness. Instead of raising taxes on current non-payers, conservatives should argue for lowering rates on current payers. In keeping with this, conservatives should also call for radical spending cuts. Ideally, conservatives would cut out all unconstitutional spending, which would cut the current budget by roughly 60%. In lieu of this, a spending cut of at least 45% would be acceptable.
At this point in time, conservatives have a good opportunity to cut taxes and reduce government spending. As long as they understand the reality of non-payers and take pains to not put their collective feet in their collective mouths, and as long as they hammer home spending cuts (hopefully in a more serious manner than Paul Ryan), they should have a chance at actually making a difference.
I’ve been writing quite a bit recently on indirect taxation, and I thought that I would take a minute to look at things from the opposite side of the fence as it were.
First, some context
for my thoughts:
The state of Connecticut passed a new Internet tax law and contends that Amazon had a physical presence because it had affiliations with websites through its Amazon Associates program. Of course, Amazon dropped the Associates program in Connecticut to avoid having to collect the sales tax or fight that contention. In fact, the same scenario took place in California this year – so Amazon dropped its California Associates program to opt of that government scheme. The headhunting tax thieves from so many states are so focused on getting Amazon, this has come to be known as the “Amazon Tax.” Theft-seeking bureaucrats are fond of supporting their schemes as a logical move to combat an “unfair advantage” that they say online retailers have over brick-and-mortar retailers.
Many people generally only think about the direct taxes they pay when considering alternative tax policies (this being, of course, a form of the broken window fallacy). The same mindset is found in bureaucrats who, contrary to popular belief, are actually human.
Bureaucrats get excited about finding new ways to increase tax revenue, as was seen above with Amazon. They found a new way to charge taxes, or so they thought. There models assumed that Amazon would simply comply because they would not want to forego the extra profits found by selling through their associates in that state. Unfortunately, Amazon’s margins are pretty thin. So thin that, as Karl Denninger has observed, collecting sales tax will kill their competitive advantage. Thus, not having any business sense or, apparently, access to financial reports, Connecticut decided to charge Amazon sales tax because it had associates in the state. Amazon cut ties in order to avoid paying taxes.
As is readily obvious, Connecticut won’t be seeing the increase in tax revenue it’s expecting. But they should also see a drop in revenue from the income tax because associates are now not earning anything from being associates, and will therefore pay less. Some may even move out of state if being an associate was their main job in order to recoup their lost income. There should also be negative repercussions on sales tax revenue, since former associates will likely spend less money. Astute readers will note that this is basically the money multiplier effect being negatively applied to taxes.
What’s astonishing is a) how bureaucrats thought there was not a single chance that Amazon wouldn’t pay the new tax and b) how bureaucrats failed to account for the possibility of Amazon dropping the program. Quite simply, it is amazing how bureaucrats apparently did not even contemplate how their tax policy has indirect effects on other tax revenue. Their stupidity is simply astonishing.
Under Herman Cain’s 9-9-9 tax reform plan, 84% of U.S. households would pay more than they do under current tax policies, according to a report released Tuesday by a nonpartisan research group.
First off, there’s a word missing here. It would be more accurate to say that more households would pay more direct taxes under Cain’s plan. People already pay plenty of indirect taxes now; Cain’s plan would simply make people face their costs head-on. Also, this plan appears to eliminate one-time taxes like the estate tax, which is a good thing.
Second, it’s a good idea for more people to foot more of the tax bill. One way to increase government accountability is to make sure everyone has skin in the game. Fiscal prudence will become more of a national concern if most citizens’ tax bills go up.
Under the current system, most of the lowest income households end up owing no federal income tax. That’s because their incomes are so low that they’re exempt, or because their tax liability is canceled out by the standard deduction and tax breaks, such as the Earned Income Tax Credit.
The Cain plan doesn’t exempt very low incomes from taxation. And while it would eliminate the payroll tax, which is the heaviest tax for low-income families, that tax relief would be offset for many by the elimination of the EITC and other tax breaks they qualify for now.
From what I gather, the lowest earners wouldn’t pay that much more. Employee-side payroll contributions are already 7.6% of income; bumping it up to 9% is not going to be that huge a difference. Actually, factoring in employer-side matching for Medicare withholdings, employee withholdings are already effectively at a 9% income tax. Thus, the only poor see their tax burden increase is by the elimination of tax credits. I don’t have enough information at this time to determine how much of an increase the lowest quartile of income-earners would see their tax burden rise by. However, since the lowest quartile of earners take a decent amount of government benefits, I don’t really have a problem with the government charging for them.
But the majority of the highest income households would get a tax cut. For instance, 95% of those with more than $1 million in income would receive an average tax cut of $487,300.
These people would then spend their newfound riches more efficiently than the government, which is a plus in my book. At any rate, I don’t get caught up in this class warfare because I just don’t care. I don’t think the wealthy are inherently more or less deserving of their wealth than others.
Under Cain, capital gains — a notable source of income for the wealthiest Americans — would be tax-free. He would also preserve the charitable deduction. And taxing all non-capital gains income at 9% would amount to a considerable break from today’s top rate of 35%.
At the very least, the tax code should not disincentivize investing, since investing is a key to wealth and economic growth. Better yet, the tax code should encourage people to invest and save (if I recall correctly, the capital gains tax applies to savings where the interest earned exceeds $50).
Cain’s plan has been criticized by those on the left, who say it would hurt the poor, and those on the right, who worry a new national sales tax is an invitation for the government to raise taxes over time.
I’m not a fan of wealth redistribution, so I view taxes as payment for services. If poor people want the government to do something for them, they should pay for it. And since the government does many things for poor people, poor people should rightly expect to either a) actually pay something or b) pay a closer approximation to the cost of the benefits they receive.
As for conservatives, I share their concerns about new taxes. If you give the government an inch, it will take that as a sign to increase taxes. I would suggest that the introduction of a new type of tax (e.g. consumption tax) be accompanied by the elimination of a tax of similar scope and coverage (in terms of revenue). While simplification is good, I don’t think Cain’s proposal simplifies things enough. Also, I don’t think that his proposal is going to survive once the class warfare aspects of politicking start up in earnest during the upcoming election cycle.