Tax policy implementation, Microeconomics

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Tax Policy Implementation: 

Take, e.g., the case of tax policy. It attempted to raise resources by a combination of direct and indirect taxes to finance a large part of increasing public expenditure (for the growing role of the state for maintaining law and order, national security, regulation, welfare and development). It is widely admitted that the tax administration could not prove itself equal to the task to prevent widespread and regular leakages of revenue. However, there seems to be inadequate recognition of the limitations and built-in defects in the design and law of the taxes, including their frequent changes which made its success problematic. The scheme of taxation, adopted at the suggestion of Professor Kaldor envisaged high marginal rates of income tax.

Any evasion of the income tax, finding its way into either expenditure or buying of assets and was sought to be captured by means of expenditure and wealth tax respectively. Another avenue of tax avoidance was sought to be plugged by imposing gift tax. As a major step towards a progressive tax regime, the inherited wealth was taxed by means of estate (or death or inheritance) duty. It is a well-known story that even with such a comprehensive and well thought out scheme of taxation, the tax administration could not prevent large-scale and growing tax evasion. It is among the factors that gave rise to a burgeoning black economy. 

In course of time, poor and indifferent implementation of tax laws forced the Government to place greater reliance on indirect taxes and Non-tax revenue like internal and external public borrowing and deficit financing (i.e., printing money) to finance public expenditure. In any case, political hardship never imposed the expenditure tax. It is clear that the tax policy failures and its impact applied brakes to the rate of growth of public investment. This, in turn, became a major factor weakening the plans. Thus, it is clear that the implementation level failures of the tax policy have their roots going deep into the very design of policies, their assessment of social reality, interface between policies and society in general and the economy in particular and in the nature and capacity of the state. A tax policy is not just a matter of tax base and tax rates or even the tax law. Non-realisation of its wide ramifications and deep roots in the social reality, especially the power of the sections called upon to pay a better part of the taxes, became a major element of many-sided policy failures in India. It fuelled the speed and extended the spread of the black economy, which, as we see below, in turn, changed the very character of the Indian society in every sphere. The success of policies in general became highly uncertain in a black income and wealth dominated economy.

The fiscal crunch arising from inept and weak implementation of tax laws made the Indian state reduce its normal responsibilities, leaving large gaps in the provision of minimum essential services in areas like socio-economic infrastructure, education, health services and move in the direction of either abdicating many pressing social tasks or hope to achieve them by privatisation. Inability to raise public  investment slowed down growth of the economy, modernisation of public enterprises, develop an educated and well taken care of body of human beings, provide essential social and economic infrastructure, to mention some of the glaring instances of the adverse effects unleashed by policy failures in the arena of raising adequate public revenue to enable the state to what everyone expected it to do. The Tenth Five Year Plan highlights both the problem of resource crunch and the large unfulfilled national tasks in the spheres of socio-economic infrastructure, compulsory elementary education, health, food security, drinking water, housing, farm productivity, etc. This is a major example of how the stated and accepted goals of public policies and plans were  frustrated in practice as a result of policy implementation failures in the vital area of fiscal policy in general and tax policy in particular. 


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