Monday, July 3, 2017

Should Indians pay taxes to become a developed nation?

The finance minister of Narendra Modi government Mr. Arun Jaitley recently, in the Institute of Chartered Accountants while celebrating Chartered Accountants  Day (sic), said that India should have a “new normal” with citizens ready to pay the taxes they need to pay and a new mindset to move from a developing nation to a developed one … During the time of demonetisation I have said that India now needs to define the new normal. And the normal is whatever taxes I have to pay, I need to pay”.

Is this true? Will paying taxes make India developed as a nation? Not at all. Quite the contrary. It will make India and Indians poor. Let us see why.

Any society, at a given time, has a limited amount of resources which it can use to fulfill various unending present and future consumption needs of its citizens. The first stage of any development process requires the fulfillment of basic material needs of people. A nation of hungry people can never develop. Now, a society can either use all its resources to fulfill the present consumption needs by consuming those resources immediately or use them to fulfill present as well as future consumption needs by consuming some and investing the rest of resources in accumulating capital (both physical and human). As any sound economist will tell us, the basic requirement for a growing (developing) economy is that it uses large part of its present resources in investment to accumulate capital so that the future growth can be higher. This is like our Mr. Robinson Crusoe, on an island economy, consumes 5 fish out of his daily 10 fish catch and saves 5 fish which he invests the next day when he is manufacturing fishing net for catching more fish with less effort the day after tomorrow. If Mr. Crusoe will consume all his 10 fish catch everyday then he will remain on the 10 fish per day standard of living forever because he can’t manufacture fishing net. Without the present investment (and sacrifice of present consumption), future cannot be better. In this process the government taxation is like Mr. Jaitley forcefully taking away 5 fish of Mr. Crusoe, which he saved for investment, and distributing it to some so-called poor Mr. Friday who will use it for immediate consumption because he is poor with many unfulfilled present needs. Mr. Jaitley’s taxation thus will make Mr. Crusoe and Friday both poor in future, and not rich or developed! The same economic process of this island economy takes place at a larger scale in a nation like India. Mr. Jaitley’s taxation will make all of us poor and not developed.

Also, the idea that Mr. Jaitley – i.e., the government – somehow knows where and how to invest Mr. Crusoe’s saved resources (fish) is false. Only and only Mr. Crusoe knows what he wants in his life. Only he knows what is good for him and what is bad. Only he knows well his subjective needs. No Mr. Jaitley can replace that subjective calculation of an individual citizen of any nation. If on one hand Mr. Crusoe wants fishing net then on other hand Mr. Jaitley will use Mr. Crusoe’s saving in starting a Smart Island or Swaccha Island or any such boondoggle project wasting that saving in things that no one wants!

In conclusion, as professor Mises said, the poverty of the backward nations is due to the fact that their policies of expropriation, discriminatory taxation and foreign exchange control prevent the investment of foreign capital while their domestic policies preclude the accumulation of indigenous capital (The Anti-Capitalistic Mentality, p. 83). Government taxation, no matter how small, wastes precious resources of a nation; it crowds out all productive investment activities in a nation, and so makes it poor and not developed. Mr. Jaitley either doesn’t understand basic economics or, as usual, he is taking gullible Indians for a ride!