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For Prelims 2016

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Daily Quiz and Discussion for Prelims 2016
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Fiscal Capacity

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Ability to generate revenues

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How does govt generate revenue?

Tax revenue
Direct taxes Income Tax, Corporate tax
Indirect taxes Excise, VAT, GST

Non- Tax revenue

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Dividend from profit making PSUs

Fines, Charges etc

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Depends on factors such as

Natural resource wealth

Industrial capacity and the level of technological development
Human resource

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Fiscal Capacity

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Decides Long term economic development

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Depends on Fiscal policy (Spending and Taxation policies) of the govt

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Assessment of Indias Fiscal capacity

Tax - to - GDP ratio India under-taxes

Spending to GDP ratio India under-spends

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Individual Tax-payers = 4% (Target of 23% But How?)

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Allow natural growth in tax base Refrain from increasing exemptions

Create legitimacy in the state Improve citizen services People to happily pay tax

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Cross country comparison

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Indias taxation and spending trends

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Importance of Taxation

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Democracy and Taxation

If spending is about entitlements to citizens
Then taxation is about obligations of citizens
Democracy is a contract between the state and its citizens

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States role : Create conditions of prosperity Essential services and Income

redistribution
Citizens role : To hold the state accountable

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Taxation is an important economic dimension of democracy

If a citizen does not pay taxes he becomes a free rider and is not bothered
much about states accountability
Hence, Taxation is the glue that joins citizen with the state and hence
ensure accountability of the state
But citizens will be ready to pay if they see legitimacy in the state actions

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Moving to a better equilibrium

Reform through inaction

Do not increase exemption threshold

Allow natural growth of tax base

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Increase state legitimacy

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Economic costs - Undermines legitimacy of the state

Subsidies to the well-off

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Spending priorities must include essential services

Reduce corruption

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1 lakh Cr - Need to be rationalized

Property taxation and taxation on farm income of Super rich farmers

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Property taxation Progressive and not easy to evade as on fixed assets

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Conclusion
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