India Fact of the Day

In India, for example, the number of taxpayers in relation to voters in the economy has been about 4-4.5% for a long time.

That is from an in-depth discussion about the Indian economy between Karthik Muralidharan and Arvind Subramanian (Chief Economic Adviser, Government of India). The reference is to income tax, of course. It’s a great discussion and the best place to begin if you want to understand the Indian economy today.

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When I studied economics as an undergrad in the early 1970s, developmental economics was at the forefront and is what interested me the most. The focus then was on developing countries, India in particular (JKG was JFK's ambassador to India from 1961 to 1963). Unfortunately we got diverted from developmental economics to political economy and fights over ideology and ideological purity. It's in that context that I interpret Tabarrok's blog post. That's not to suggest that the dominant approach to economic development in the past was the highpoint in economic development theory, far from it - not least was the obsession with "planning". Fortunately, not everyone is obsessed with ideology and ideological purity, and that includes India's chief economic adviser, who is the subject of this very interesting dialogue. He evinces a level of flexibility that is refreshing, while keeping true to market principles. What works in India may not work in China, and what works in China may not work in the U.S., and what works in the U.S. may not work in Singapore (which is a reason I'm ambivalent (not critical) about Cowen's love affair with Singapore). But there is a theme in the dialogue that is in common with much of the discussion of economics here, and that's the need for greater investment in infrastructure and education and for banking reform (those bankers) and for tax reform that doesn't choke economic growth but provides sufficient revenues for essential services and public benefits. Taxes bad, inequality good. That may be necessary for ideological purity but it's insufficient for real world economics.

"greater investment in infrastructure and education": I suppose it's possible that more spent on education might do India good. The US is surely well beyond that point? I wonder whether there is a reproducible maximum on the curve of benefit vs expenditure on education.

And expenditures on education don't assure much on their own. State school systems in developing countries rather easily fall into bureaucracy-heavy, politicized organizations that provide patronage jobs as their primary function (and a lousy education to students as a secondary effect). This seems to have been the case in India where private schools (and MOOCs) are starting to fill the gap.

Well said; and not just in developing countries.

By "taxpayers" do they mean payers of income tax? Surely many more will pay (if they exist) gasoline duties, tobacco taxes, alcohol taxes, ........

What an odd thing to say. India's sales tax averages around 12.36% and out of a population of 1.3 billion I suppose there would be some people who go a whole year without buying anything that has sales tax on it or paying any other taxes, but I really don't think the number would be 95.5 to 96 percent. If they are referring to just income tax then that is perfectly understandable as people in India who earn less than about $4,000 don't pay income tax and the nominal per capita GDP of India is about $1,650 with the median being significantly lower. However, I don't see how Arvind Subramanian can be referring to just income tax as he specifically says, "...the fiscal contract between citizens and the government is very important for accountability and institutional development." And I don't see how he could think that only income tax covers that. It's all very strange.

A large part of the economy is underground.

Yes - they mean Income tax

Strange wording of a very odd statistic. What is the intended point?

In the U.S., voter turnout in an average election is 20-30% and 50-60% in big Presidential elections. So our ratio of taxpayers to voters is more like 200%.

what in the world are we to take away from this post? is income tax supposed to work as a proxy poll tax by which we separate the makers from the takers?

When the income tax was first introduced in the US, only a small percentage of the population paid.

@Ed- and those were the days! If today's government only took taxes by way of duty tax, import tax, sales tax and even tax on tea the world would be a better place. The income tax is like mass conscription in war: it allows bigger, nastier and costlier wars to be fought. Big government started with the Progressives and their hare-brained schemes for income tax on the rich.

Factoid: something like five free-lancing professionals in Greece paid tax last year. And that's a good thing (starve the beast). Tax scofflaws = freedom fighters! Our Founding Fathers would agree! (the Boston Tea Party was largely an attempt by venal vested interests in Boston such as by S. Adams to avoid competition, though it morphed into a protest movement for independence).

The Boston Tea Party was a protest by smugglers that the duty on tea had been reduced so far that they could no longer earn a dishonest living.

@dearieme- yes, that's what I call 'venal vested interests'.

The point of the statistic to express that Indian tax payers who chose to legitimately pay taxes (whether income tax or other tax) have little influence (by choosing elected representatives) on the taxes they are subject to, since they constitute only a small part of the voter pool.

The comment "I suppose there would be some people who go a whole year without buying anything that has sales tax on it or paying any other taxes" by Robert Brak could only be made by someone with no exposure to life in a developing/underdeveloped country. It ignores the stark difference between living in a developed country and a developing country.

Unlike developed countries like the US, where almost every sale/income is logged electronically and has a recorded receipt/trail, in India, a significant portion of sales/rental payment/income can be, and indeed, is, "arranged" between buyer and seller on a "cash" basis so that no sales tax is paid. Cash is prevalent, and few people use credit cards or electronic payment. Of course, this is more difficult in bigger cities like Mumbai, but it is extremely common to buy and sell without paying *any* kind of tax that reaches the Government at all, unless kickbacks are considered taxes. Even houses are bought an sold with 10-50% of the actual property value being reported (known as the "white" payment), and the rest paid in cash (called the "black" payment).

A rather patronizing response. Yes, tax evasion is widespread in many developing countries and not a few developed ones. That doesn't change the fact that India does have a VAT law which, in fact, mandates that larger businesses ensure "every sale/income is logged electronically and has a recorded receipt/trail."

For instance, large numbers of Indians (more than 4%) use cell phones with pre-paid SIM cards. The credit on those SIM cards has been subject to taxation for years from what I recall and that is the sort of business where there is a pretty clear record and audit trail. Yes, businesses in other industries are able to evade or minimize their VAT liability. That doesn't change the fact that 96% is almost certainly an overestimate of the percentage of the population that operates completely off the grid as far as the revenue authorities are concerned.

Oh. I thought this post was referring specifically to income tax.

I don't get the statistic. Either it's uninteresting or likely false.

If it's just referring to income taxes, which make up only one-sixth of India's revenues, then Robert Brak's point explains it quite clearly (no taxes on the first $4,000 of income means few have to pay taxes in a country where the majority of people make less than $1,500). Further, since income taxes only represent 17% of India's government revenues, what is relevant is who pays the other 83%. So why do we care about the 17%?

If it's referring to all taxes, I would find that hard to believe and would like to see some supporting evidence. First, the vast majority of tax revenue in India come from corporate taxes, excise taxes, and customs. Those will be borne by basically anyone in the formal sector, which represents about 30% of the Indian workforce. Based on this, it seems that a more accurate estimate would be closer to 30% of the population, perhaps more to the extent that people in the informal sector every purchase anything in the formal economy. Given that less than 45% of the population turned out to vote last year, this suggests a taxpayer-to-voter ratio of perhaps 70% (~=30%/45%) or higher.

The statistic is very likely true (income tax payers are 4% to 4.5% of the total voter base). It is also interesting because it implies that:
1. A large percentage of voters are not paying income tax (which implies a large informal job and goods market)
2. Tax payers not really a significant voice in vote-bank politics

As for all the noise about per-capita income being $1600 or thereabouts and no taxes on income under $4000, note that the per-capita income is calculated on the total population. India has about 41% of its population under the age of 18 (legal voting age). So, if you calculated per capita income among voters it will more likely be closer to $4000. Assuming some sort of normal distribution curve, you should expect a significant percentage to be over $4000, not just 4.5%.

Looking at income per voter certainly gives a figure closer to $4,000 than GDP per capita, but the average salary in India is still only around or under $3,000 and the median salary would be less than that. But not vastly less as India's Gini coefficient is about 0.34 which is much lower than most countries of similar per capita GDP.

Actually, HitchHiker, I'm pretty sure that it is quite rare for Indian adults to, "...go a whole year without buying anything that has sales tax on it or paying any other taxes” About 23% of Indian adult males smoke and one in four Indian adults use smokeless tabacco. That's taxed. Food is taxed, including the million tonnes of wheat India is importing this year. Clothes are taxed. Jewelery is taxed (maybe only 1% though). Toddy is taxed. No doubt there are toddy brewing, tabacco growing farmers leading a subsistance lifestyle who weave their own clothes in between crafting their own personal adornment who never pay taxes, but I am inclined to think they are not likely to be particularly common. While I would be quite surprised if all the value added or other sales taxes that are supposed to be paid were being paid, I strongly suspect that the majority of Indians are at least paying some.

"The reference is to income tax, of course."

- from the blog post.

The last sentence is the key to whole post, and tie it to the recent post about economists and pre-market exclusion. A whole lot of electrons spilled above trying to rationalize the numbers and explain them based on what is expected, rather than just taking it as a stark difference from what is normal in our own experience.

It would be fairly easy to construct a tax scheme based on information consumption that could be as efficient, enforceable and progressive as any western income/VAT/sales tax. So then you would have 0% of voters paying an income tax. Or you could devise a system where all income is taxed and then refunded anywhere from 150% down to 10%, which again would be as efficient, enforceable...and then 100% of voters would pay income tax. Immediately the response would be to figure out how we square that so it fits with how we currently expect taxes to be imposed. As if by relating the incidence of the tax, based on categorical definition, is a meaningful starting point for an economic understanding of a distinctly different culture.

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