Politics of Taxation

This post is triggered by this article in the CRI website.

Discussion on economic rationale of taxation or rather the economic rationale for *evading* taxes is not new. During my CA I had a paper on Tax Planning which makes fine distinction between Tax Evasion and Tax Avoidance.

The best explanation for this would come from what is familiarly known as the *McDowell’s case*. J Chinnappa Reddy who wrote the judgement puts it succinctly at the beginning:

The shortest definition of tax avoidance that I have come across is the art of dodging tax without breaking the law. Much legal sophistry and judicial exposition have gone into the attempt to differentiate the concepts of tax evasion and tax avoidance and to discover the invisible line supposed to exist which distinguishes one from the other. Tax avoidance, it seems, is legal; tax evasion is illegal.

  Justice Holmes the man most quoted in these contexts has this to say:

Taxes are the price we pay for a civilized society.

  • Reportedly said by Holmes in a speech in 1904. Alternately phrased as “Taxes are what we pay for civilized society, including the chance to insure”,Compania General De Tabacos De Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100, dissenting; opinion (21 November 1927). The first variation is quoted by the IRS above the entrance to their headquarters at 1111 Constitution Avenue.

Those interested in more quotes of his can see them here at Wikiquotes.

My 10 year old son is my Guide in matters of ethics. Few months back, i had an interesting conversation with a famous editor of a famous newspaper. He was proud that his paper called *Illegal Immigrants* as *Undocumented Migrants* Then i raised my son’s objection to my crossing a red signal at 6 AM in the morning. When he agreed with my son I could ask him if jumping a red signal is dangerous how much more dangerous would it be to jump a country’s border.

The point is Laws are made to make live easier. Breaking a Law would lead to chaos. There can be no moral justification in breaking a law. Even an immoral, illegal Law. The tamilians would appreciate this: *Nettrikan thirapinum kutram kutrame*.

As for the Economic Justification, I have discussed this a few times over the years. Smuggling is the simplest example of economic justification against taxes. Smuggling happens because the State places a tax that provides an opportunity for arbitrage. Take Gold which was the darling for smugglers. Socialist mindset made Indian Governments place high customs duty on Gold. Given the huge appetite for gold, it became profitable to smuggle gold. But when duties on import of gold went down smuggling became unprofitable. No amount of policing could have achieved this.

If one feels, the tax that one pays is frittered, the person has legitimate grouse. After all (s)he is denying themselves (with their family) something and paying it into the common kitty. If every one feels they should get more than what they put in, the whole thing fails. This is not the point of the author also. The author has a legitimate grouse when he says the money is siphoned and not put to proper use.

India is no Banana Republic, whatever we might say in our angst against the current corrupt dispensation. Neither are we a Kleptocracy. But a large amount of our taxes are wasted in futile programmes of the Government or even looted.  

 But the Conservative in me can react in the only way I can: *We will improve the system.*

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