Let us first explore the often quoted concept of equity in slightly greater detail. Let us once again turn to Prof. Cintra for a meaningful elaboration [1]

·There are three possible principles of equity:

·the benefit principle, taxing individuals according to the benefits they draw from public services

·the liberal principle, according to which individuals should be taxed proportionally to their consumption, that is, to the use they make of society’s production

·the socialist principle, according to which individuals should be taxed progressively, according to their ability to pay, which reflects the contribution they make to society through their productive efforts.

The socialist principle is quoted by the leftist. On the other hand those to the right swear by the benefit principle. The fair path, as often is the middle one, i.e. the liberal principle. As stated earlier, conceptually BTT is essentially similar to a fee charged for the social good of efficient, safe and reliable bank transactions!

Since the BTT is going to be levied at one fixed rate on all bank transactions, the most likely objection is that this goes against the established practices of progressiveness in rates and hence it is not progressive and therefore regressive in nature!

Let us look at some interesting details. First let us look at the relevant material from Prof. Feige. While responding to the same concern of progressivity he states:[2]

In order to gauge the distributional impact of the APT tax, it is necessary to estimate the distribution of payments made by different income classes. The strategy employed in this paper is to simulate the transactions patterns of U.S. households …. It reveals that higher income groups hold not only a disproportionate share of net worth, but conduct a similarly disproportionate volume of transactions. Since both net worth and total transactions are much more highly skewed than the income distribution, a switch to the APT tax will promote a progressive tax structure through the skewness of the tax base rather than through progressivity of tax rates.

This is about conditions in the USA. One could say that this condition may be true in a well-developed nation like US but the case in India would be different. Fair enough, so let us take a look at a comparable country. Prof. Cintra makes some precise and pertinent comments about this often cited but improperly understood requirement of progressiveness:[3]

·As a direct tax, the bank transaction tax is neither progressive nor regressive; it is proportional, as long as it has a single rate. This means that for each individual transaction, the single rate would guarantee incidence that is proportional to the value of the transaction. Indirectly, as it becomes an item in production costs, it is alleged to be regressive.

·The concept of tax progressiveness has been strongly attacked by several scholars. Indeed, “progressive taxation appears to have lost much of its political appeal…people became increasingly convinced that the economic costs of progressiveness were too high to make it worthwhile”. Mario Henrique Simonsen reaffirms the same concern about excessive progressiveness, saying, “Today, the merits of progressiveness are strongly contested. A good portion of developed countries has considerably reduced the number of progressive rates, as well as the maximum rate. And the trend seems to return to proportional taxation, with one single exception: the exemption limit below which the taxpayer is released from any tax. The fall of the myth of progressiveness is due to several factors. First, the distribution of wealth promoted by the Government is not a function merely of a single tax, but depends on a set of taxes, and most importantly on the composition of public spending. What good is there in having an income tax that is strongly progressive if other taxes live along-side it that is strongly regressive?” The best thing would be to merge them into a single proportional or averagely proportional tax. On the other hand, what good is a progressive tax system if public spending benefits the rich much more than the poor? It would be better, in that case, for the budget to shrink and for the market to handle the conflicts of interest of the rich. Truthfully, the great distributive task of the Government should be handled through the operations of public spending, offering education, health, and assistance to the most needy.

Exactly the approach that the ArthaKranti BTT Proposal takes – ensure adequate revenue by simplifying taxation, tax at one low rate and then spend progressively to meet all the genuine needs of the different segments of the society. In detailing the actual progressiveness of the BTT Prof. Cintra refers to the evaluation done and states:[4]

·Maria da Conceição Tavares evaluated the alleged regressiveness of bank transaction taxes, considering their incidence by income brackets. In her article “Imposto sobre circulação financeira” she says: The argument that the tax would basically penalize the middle class is unjustified. This is a tax that primarily penalizes individuals who turn the financial circulation of their savings into an extra and often considerable source of income.”

·She adds “Because they are one of the dynamic vectors in the economic restructuring and globalizing process, bank transactions constitute one of the few potential bases for future taxation in which it is possible to anchor public revenue increases without punishing the productive sectors and the needier social segments”. (Detailing the findings she states)

oThe lower-income groups… are presumed not to use the banking system and therefore would not be directly affected by the tax.

oOf the remaining 29.4 % that operate through the banking system, the tax burden falls predominantly on the higher-income groups …. This latter segment, which accounts for a scant 3.4 % of the reference population and less than 12 % of individuals with bank accounts, holds 29.2 % of total income and would account for 63.5 % of the IPMF (Acronym for the Portuguese name of the BTT) revenue paid by individuals….. In other words, the argument that the tax would unfairly penalize the middle class is not supported. This is a tax that burdens those individuals who make bank transactions an extra and considerable source of income.

oFinally, the index of progressiveness, presented in the simulation …indicates that higher-income sectors not only pay relatively more taxes, but they also pay at proportions that are much higher than the differences between their average income and that of other groups.”

Summarizing, Conceição Tavares says that an electronic tax is desirable, given that it does not create distortions in the productive structure and is levied proportionally on taxpayers. Furthermore, it reaches the informal sector and minimizes tax evasion.

Given the similarity between Brazil and India, one can state that these observations would apply to the India verbatim. A similar simulation could and should be done to ascertain these claims by using Indian data.

Elaborating further the changed nature of taxation and its far reaching effects with respect to progressiveness, Prof Cintra states: [5]

·One of the most frequently raised questions about a bank transaction tax has to do with its progressiveness. Critics claim it is regressive. Actually, because it is a cumulative (turnover) tax, products that involve a greater number of transactions along the productive chain – with more roundabout production methods – and those that add less value at each stage, will be more heavily taxed. Thus, the Single Tax system should have a natural degree of progressiveness given that wage goods – staple products that make up the demand bundle for lower income families– would tend to have a lower tax burden than that of relatively more sophisticated products. Wage goods usually have less roundabout production chains, with less processing and a high rate of added value relative to the value of inputs at each production stage.

·Another interesting feature of the Single Tax proposal is that income and production become no longer the main components of the tax base, as happens in conventional tax systems. The tax base would shift to financial transactions. Thus, productive activities become less taxed, and those that involve mere asset transfers, that currently are notoriously under-taxed, such as estate and personal property transactions, would be more heavily taxed.

·The Single Tax proposal has, some essential characteristics that must be stressed: it ensures tax collection; it eliminates tax evasion and fiscal corruption; it increases efficiency of tax collection; it frees up significant resources in the private and public sectors; it is a comprehensive system; and it exhibits natural progressiveness.

The last point above, made by Prof. Cintra is especially relevant. In Chapter 2, we have looked at the FRBM Act Implementation Task Forces observations about the regressive nature of the current Indian tax system – primarily due to evasion and costs of compliance. Since these are nullified, and the tax base is naturally skewed, the AK-BTT can correctly claim that it is a progressive tax in practice.

Additionally and importantly in our case, we do not tax cash transactions at all since these will be primarily done by the poor. (Let us remember here that the High denomination notes will be removed and hence high valued cash transactions will not be feasible.)

On the same theme, Prof. Cintra further responds to the related objection of “contributive capacity being disregarded” as follows:[6]

·Critics forget that this principle is not upheld in conventional taxes and not even in value-added taxes, because these are due irrespective of the profit earned. (True for all indirect taxes everywhere)

·(Additionally) Those who deny the notion those taxes can only be collected when contributive capacity is assessed respond by stating that, according to the benefit principle of taxation, even in a loss, companies benefit from the country’s infrastructure and, therefore, should pay taxes.

 


[1] Page 142, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[2] Page 17-18, Taxation for the 21ST Century: the automated payment transaction (APT) tax, October 2000,  Edgar L. Feige

[3] Page 65, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[4] Page63, 64,  Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[5] Page 62-63-64, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009

[6] Page 62, Bank transactions: pathway to the single tax ideal A modern tax technology; the Brazilian experience with a bank transactions tax (1993-2007), by Cintra, Marcos, July 2009