The Great Gamble
This idea regenerates itself from the basics of automated payment transaction tax. Capital mobility, transfer pricing, offshore tax havens and internet commerce have made it increasingly difficult to assess origins of income and profits. The dissatisfaction over the present system arises out of overly complex nature of taxation that gives broad fixes and directs the system towards inefficiency and inequitable distribution.
The time may be ripe to consider a small, uniform tax on all economic transactions that involve simplification and that can be readily implemented. The banking transaction tax (BTT) approach would extend the tax base from income, expenditure, consumption and wealth generation, to all transactions. It may also be viewed as a fee accessed by the government to pay for providing the monetary, legal and government institutions that facilitate trade and commerce.
Efficiencies of the Concept and Pitfalls
The banking transaction tax collection will be at source and, therefore, reduce administrative and compliance costs. This includes the feature to file tax and information returns on income and expenditures. The targeted beneficiaries are those in the salaried class and wage earners with modest assets. This will also include those who would believe to transact largely in cash.
The potential benefits of this universal transaction based taxation system are on broadening the tax base. When economists speak of tax base being broadened, they mean a wider range of goods, services and income has been made subject to a tax. The system will now be reliant on individuals increasing the count for this base. India has approximately 684 million savings bank accounts and a population base of 1.2 billion, that is, less than 50 per cent. Now approximately 50 per cent of the population is below 25 years of age. Which would mean in a way that those above 25 years have bank accounts? So the target increase in the base would be those between the age of 18years and 25 years.
The question that now arises is that will the people be interested in opening new accounts if the unemployed student also has to pay tax on the money he has to spend to for his education? Having considered the fact that his parents have already paid taxes in first transacting the earnings into their account and then pays to remit a sum for their children’s studies and then the unemployed child also pays to take money out of his account, so that he can be educated. Lack of awareness, low incomes, poverty and illiteracy are among the key factors that lead to a low demand for financial services and, consequently, to exclusion. The move towards banking transaction tax would then tend to go against general understanding of the public and can fly in the face of the political think tank by slowing down financial inclusion and destroy the government’s aim of including every adult in the country with a bank account.
The understanding of BTT should not necessarily be extended to financial transaction tax (FTT) which is a levy placed on a specific type of monetary transaction for a particular purpose. The concept is associated with the financial sector and does not include taxes paid by consumers for expenditure. Those perceived to be the losers will be financial institutions and entrepreneurs that make for market assets and, of course, those who advice on how to minimize tax under the current system.
Having accepted the fact that there is a parallel economy of ‘black money’ existing and with this a more dangerous trend may emerge. Technological innovations such as anonymous forms of digital cash that represents a private substitute could raise problems of a different dimension.
The BTT would shift the role of the government from an active partner in the outcomes of financial exchanges to an agency establishing only the costs of admission while those who choose to transact would just bear the burden of losses or reap the advantages of earnings.
To estimate the desirability of BTT it will be very important to weigh the benefits against the pitfalls. The nobility of the idea trades with the fact that tax breaks and exemptions should cease entirely if this has to be an option. No benefit comes without a cost. The costs of redistribution in the nature of expenditure, reduction in taxes from the present tax base and the expected payoffs from an unrealized broadened tax base can be more than an unnerving financial gamble.