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Journalism of Courage
There are demands to increase the tax rate paid by companies. Classical public finance suggests that we should focus on individuals as the tax base. Ultimately, all income lands up in the hands of individuals. The government should have nothing to do with the ways in which individuals organise production 8212; be it proprietorships, partnerships, companies, clubs, NGOs, associations, and so on. To tax the mechanisms of production, over and beyond taxing individuals, is wrong because it gives people incentives to organise production in distorted ways, so as to avoid taxes. These distortions hurt growth; they hinder the growth of the goose that is laying the golden egg.
In India, we have tried to address this problem by removing the double taxation of dividends. This is a laudable quest but a messy solution. For example, mutual funds buy bonds, and pay out interest received from those bonds as 8220;dividends8221;, and these payments enjoy tax exemption since dividends are tax exempt. The corporate tax framework continues to suffer from a very high depreciation rate, which gives our companies a tax subsidy in favour of capital-intensive production, and disfavours labour-intensive production. The best method to remove double taxation is to eliminate the corporation tax altogether, and only tax individuals. With the new IT systems in tax administration, it is easy to ensure that every bit of dividend paid by companies to individuals is properly tracked, so that personal income tax is paid correctly. This correct solution would get government out of an involvement with how production is organised, and refocus the income tax purely on the financial flows surrounding individuals.
