Why necessity is the mother of all taxes

Why necessity is the mother of all taxes
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First Published: Mon, Feb 18 2008. 02 30 AM IST
Updated: Mon, Feb 18 2008. 08 34 AM IST
Tax jokes can make even a crocodile smile. That is why jokes and quotes on taxes abound. But our friend Jinny takes taxes quite seriously. She thinks that necessity is the mother of all taxes. A penny of taxes paid is a penny of deficits saved. That sounds like our taxman. Johnny, as usual, looks at the funnier side. He wonders why the tax penny has to come out of his pocket.
Johnny: February is the month of tax jokes. One of my friends went to a psychiatrist to get a certificate that he had lost all memory of his last year’s earnings. The doc was ready to certify so, provided he paid a hefty fee. My friend agreed. You know why?
Jinny: Why?
Johnny: He agreed because his tax planner was asking for an even higher fee.
Jinny: I don’t understand why people start pretending about memory loss when it comes to paying taxes. What you pay as taxes ultimately helps you.
Johnny: Really? I never realized that. I just thought paying taxes is one ugly choice that helps you to avoid an uglier consequence. Otherwise, what is the rationale behind asking people to pay taxes?
Jinny: The rationale is very simple. Our government acts like a big daddy in our life. It works to keep our life safe, sound and free from outside disturbances. It builds schools for children and hospitals for sick people. It makes better roads and flyovers to make our travels smooth. It does numerous other things that make our life more comfortable. For doing all this, the big daddy needs money. In fact, all of us need money. In our case, we work first and get paid later. But the big daddy gets paid first and works later. You may ask why that happens. Let the big daddy take rest if he can’t work without money. But look at it in another way. If the big daddy switches off all the traffic lights, you may not be able to reach your place of work. So it is better to pay your money as taxes and let the big daddy do his work. This helps in creating a mutually beneficial relationship between all of us.
Johnny: The government takes so many different types of taxes—direct, indirect and God knows how many other invisible taxes that we are not even aware of. This makes taxes so confusing.
Jinny: There is nothing to be confused about. Direct taxes are ones which are paid by the taxpayer directly. Personal income tax, which is paid by individuals such as you and me, and corporate income tax paid by firms are examples of direct taxes. Indirect taxes such as customs, excise, sales tax, service tax and value-added tax are paid indirectly. When you purchase a product or avail a service, along with the price, you pay the indirect taxes to your shopkeeper who, in turn, passes it on to the government. Personal income tax is paid only by those who earn more than the taxable limit but indirect taxes are paid by all and sundry. Personal income tax is progressive whereas corporate income tax is proportional and indirect taxes are regressive.
Johnny: Progressive? Regressive? Proportional? Are you talking about the mood swings of our political parties?
Jinny: Well, a regressive tax is one in which everybody pays the fixed amount as taxes irrespective of income. Indirect taxes such as sales tax, excise, and so on fall in this category. You and your neighbours pay the same tax for purchasing the same toothpaste. But your incomes may be poles apart. If your neighbour is earning Rs100 and paying Rs10 as taxes, he is paying 10% of his income as taxes. However, if you are earning Rs50 and paying Rs10 as taxes, you are paying 20%. This makes indirect taxes regressive. The burden is more on people earning less.
A proportional tax is one in which everybody pays a fixed percentage of income as taxes. If all firms are required to pay 30% of their income as taxes, then a firm earning Rs10 lakh will pay Rs3 lakh as taxes and a firm earning Rs20 lakh will pay Rs6 lakh as taxes.
In progressive tax, the rate at which you pay taxes increases with your income. The higher the income, the higher the rate of your tax. This seems a bit twisted. Why should people earning more be asked to sacrifice a higher percentage of their income as taxes?
But, the taxman has his own logic. Unequal sacrifice by people having unequal incomes helps in making everybody more equal. You should try to understand the logic of taxes with the spirit of a taxman. That may help you to keep your smile.
Johnny: Yes, it is better to smile than cry like crocodiles.
What: The government imposes direct and indirect taxes to meet its expenditure.
Who: Indirect taxes are paid by all people consuming goods and services whereas direct taxes are paid only by people earning more than the taxable limit.
When: The Union government presents its tax proposals every year in the budget.
Shailaja and Manoj K. Singh have important day jobs with an important bank. But Jinny and Johnny have plenty of time for your suggestions and ideas for their weekly chat. You can write to them atrealsimple@livemint.com
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First Published: Mon, Feb 18 2008. 02 30 AM IST