Arnold Kling  

Complex System, Poorly Enforced

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Amar Bhide writes,


India's financial difficulties stem from a badly designed and administered tax system. Rates and rules for personal and corporate income taxes appear reasonable by international standards. Nonetheless, India's government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers.

...Cheating occurs because the government hasn't invested in personnel or in the systems to detect tax evaders, who rarely face jail time and can often bribe their way out of trouble when they do get caught. More subtly, the evasion of "direct" taxes on incomes and profits reflects the mess in the system of "indirect" taxes levied on production and consumption.

A system of complex tax rates, poorly enforced, is perhaps the worst of all possible worlds. Tax reform should aim for rules that are easily followed and enforced.

For Discussion. What are the advantages and disadvantages of administering subsidies directly rather than as tax loopholes?


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CATEGORIES: Tax Reform



TRACKBACKS (3 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/160
The author at Ashish's Niti in a related article titled India needs tax reforms writes:
    Indian Govt. needs to widen the tax net to include those who have take advantage of public education and agricultural income. [Tracked on November 22, 2004 2:31 PM]
COMMENTS (5 to date)
Lawrance George Lux writes:

It depends on the type of subsidies--left unexplained. No Business subsidy should be funded by tax loophole. Enforced Product Price increases are the best subsidy for absolutely essential Business profitability. Less essential Business subsidies should be granted yearly, approved (Application necessary) block grants from something like a Domestic Finance Fund. The general Business subsidies to promote growth should be low tax rates. All other subsidies should be handled by Welfare transfer. lgl

Taylor writes:

To have loopholes implies having a complex system. The smaller, more efficient, the tax system is the less distortions on the market.

Mike B writes:

"To have loopholes implies having a complex system. The smaller, more efficient, the tax system is the less distortions on the market."

However, there are cases where distorting the market to achieve a goal may be preferential - like offering tax breaks for charity donations, installing solar panels on your home's roof, etc.

Everyone is hyped up on the possibility of major tax code reform in President Bush's second term. I personally think it would take an act of God to unite the GOP enough to stand up to all the myriad different business interests over on K Street.

Ronnie Horesh writes:
What are the advantages and disadvantages of administering subsidies directly rather than as tax loopholes?

Transparency. For the same reason direct subsidies are better than import barriers too.

Austin writes:

My biggest complaint is that our convoluted system of tax breaks and incentives aren't distributed fairly. Certain industries get much greater incentives than other industries.

The tax code basically encourages everyone to put their money, not into the most profitable business, but into the business that has the best tax breaks.

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