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Simple answers to complex questions

D. Murali

AN interesting `special report', Tax simplification — Issues and options, appears in Tax Notes, dated a day before the WTC towers were hit. William G. Gale of Brookings Institution is the author of the report. His intro speaks of "the fundamental paradox of tax simplification" — that despite a consensus that taxes should be simpler, "almost every year tax rules become more complex". Proponents of such antidotes as flat tax, nil tax and so on, go to one extreme, ignoring a key consideration: Which is not the overall level of complexity, rather the test whether specific tax provisions `provide good value for the complexity they create'.

For, nobody minds the prick of a syringe as long as the doc has put the right medicine into it, just as nobody makes a fuss about waiting for the bearer to bring in the items from the kitchen if one is sure about the quality.

Well, how to define complexity? A simple definition is to put it as the sum of compliance and administrative costs. The former are incurred by individuals and businesses, as assesses, and the latter by the government's tax department. Compliance costs can be broken up into "the time taxpayers spend preparing and filing tax forms, learning about the law, and maintaining record-keeping for tax purposes." One can include expenditure of time and money spent by taxpayers to avoid or evade taxes.

What assessees bear does not end there, because administrative costs, though incurred by government, are ultimately borne by individuals in the form of tax impost.

Using a quantitative measure such as this can lead to problems when one is faced with a tax provision that is so complicated that few venture to go near it, with the result that the total cost of that piece of law may be less.

On the contrary, a deduction clothed in understandable language would find many beneficiaries who go the extra mile to factor it in their tax computation, which leads to a perception that the total compliance cost is high.

A more useful measure would be see compliance cost as a percentage of tax realised or benefit achieved. For instance, if workings showed that it cost Rs 1.20 to collect a rupee, there is a fit case for winding up the tax department to save 20 paise.

An interesting portion of Gale's report answers the question `why are taxes complex.' Blame it on four factors, he says. First is the conflict between tax equity and simplicity. This is because tax policy is a tool for achieving social goals. The second factor is interest groups and targeted subsidies. This is where lobbying works and leads to further distinctions among taxpayers, as also among sources and uses of income.

Third comes the deterrence to evasion or avoidance, achieved by a labyrinth of provisions that are aimed at plugging loopholes that avid assessees would like to bank on, using innovative transactions, to try and skirt taxes.

This is an addictive factor that works in a cycle, like the traditional cop and thief game, with one going behind the other, and complexity matched by ingenuity, countered again by more complexity, and so on.

The last factor, according to the Gale, arises out of new laws that aspire to raise more revenues to dyke in the deficit deluge. The Finance Minister¸ Mr Jaswant Singh, has held out promises of simplifying our taxes by taking a fresh look using new task forces.

A suggestion they could include could be to put in place an economically workable system of measuring the complexity of our own tax system.

hindubusinessline@hotmail.com

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