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Who pays for welfare programmes?
The government finances its various welfare programmes for the poor largely from the revenue collected through various taxes. If we analyse the tax burden — who actually pays taxes — it seems that the government is taking money from one group of poor to give it to another group of poor. Contrary to the popular perception that middle and upper classes — the better-off in short — of our society are taxed to provide welfare and support to the poor, it is actually the poor who are paying for the welfare programmes run for their benefit!
Taxes are broadly of two types: direct and indirect. Direct taxes consist primarily of corporation tax and income tax. Others like estate duty, interest tax, wealth tax, gift tax, land revenue, hotel and agricultural tax are very minor contributors. Indirect taxes, levied on goods and services, consist primarily of excise and customs duties, and sales tax. Taxes on entertainment, vehicles and electricity are other crucial components of indirect taxation in our country.
Indirect taxes are, by and large, regressive. That is, the poor who consume almost all of their incomes pay more indirect taxes in proportion to their income compared to the upper classes. How? Consider a poor man Ramu earning Rs 3,000 a month. He spends all of his income to meet his basic existential requirements. On every paise he spends, in buying salt, matchbox, slippers, or alcohol, he pays either sales tax, or excise, or customs duty (if the alcohol or cigarettes happen to be imported). Assume for a moment that the average of these indirect taxes comes to 10%. Ramu then pays Rs 300 in indirect taxes (10% of Rs 3,000). Rony, on the other hand, earns Rs 30,000 per month. He spends Rs 20,000 on his consumption needs and the rest is saved. He also pays some form of indirect tax on every paise of his Rs 20,000 that he spends on Cuban cigars, Cognac, or Honda City. At the rate of 10%, the taxes would amount to Rs 2,000 for our richie-rich Rony.
While dealing with these two hypothetical cases, you have surely not missed a couple of important implications: one, in proportion to their incomes, Ramu pays 10% of his income in indirect taxes (Rs 300 [tax]/Rs 3,000 [income]), Rony, however, pays only 6.66% (Rs 2,000 [tax]/Rs 30,000 [income])! Second, Rony does not pay any indirect tax on Rs 10,000 that he saves. Indirect taxes are regressive — tax burden is heavier on the poor than on the rich.
Table 1: Tax Revenues of the Union Government
Table 2: Effective Rates of Major Indirect Taxes by Expenditure, 1988-89
Source: "Who pays for Taxes?", Aggarwal, Pawan. K, Gayatri Publication, 1998, taken from SARVEKSHNA, VOL xiv, NO. 3, issue No. 46, January- March, 1991, pp S-7 & S-8
Table 1 gives the break-up of the net tax revenue of the Union
government in terms of the direct and indirect taxes it levies, as well
as their share in total tax revenue for a few years. Till 1994, the
share of indirect tax was well above 70%, which began to fall, once the
economic reform began kicking in, to about 59% in 2004.
The L K Jha Committee on taxation reforms had reported in early
1980s that 85% of the taxes were collected from the poorer section of
society. Many of the tax reforms since have tried to shift the burden of
raising government revenues from indirect to direct taxes.
(Authors are with Centre for Civil Society)