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Freebies, handouts and other myths loved by income tax payers

Renuka Viswanathan writes: Schooling, water, healthcare and other services and utilities, which are made available for free by the government to everyone, cannot be called ‘freebies’.

Written by Renuka Viswanathan |
Updated: October 15, 2021 7:59:39 am
Taxpayers already have a say in the government’s spending decisions. (Illustration by C R Sasikumar)

A message floating around on WhatsApp groups is demanding that a “taxpayers’ union” should be set up and consulted by the government. An income tax officer has apparently made the suggestion, but this is difficult to believe, as it is rooted in an ignorance of facts and a poor understanding of political economy. Yet, the idea is being greeted with exclamations of enthusiasm by PLUs (people like us) of the middle class, who are convinced that their hard-earned taxes are being squandered on the undeserving poor through “populist” programmes announced before elections.

Underlying the proposal is the basic fallacy that income taxpayers are the main funders of government. Today, less than one-third of the combined spending of state and central governments in India is raised through income tax. It’s the taxes on commodities that meet more than half the expenditure of the government and these taxes are paid by all citizens, rich and poor; by those who are accused of getting “freebies” as well as by the middle class, which believes that they are being fleeced to pander to politically favoured groups. The rest of the spending comes from borrowings, grants, disinvestments and various non-tax revenues.

Besides, taxpayers already have a say in the government’s spending decisions. We do have a “taxpayers’ union” today. It consists of all the voters (including those who pay income tax) who elect legislators, who then approve government budgets after lengthy debate in state assemblies and Parliament. Are we now asking for an exclusive veto power over spending decisions for income taxpayers, who pay only one-third of the bill?

Beyond these fundamental flaws, there is an additional question: Which government programme would you call a “freebie”? From the sense of grievance felt by some income taxpayers, it appears that any special financial consideration given to a favoured group is a handout or “freebie”. The term “subsidy” has a specific meaning in economic parlance, but it is full of value judgement when it is used in popular debates. It has now become a loose synonym for profligacy, favouritism and injustice. What income taxpayers resent is apparently preferential payouts from the budget to a select group, and favourable treatment towards powerful lobbies.

Governments use different methods to target benefits. They spend more on some citizens and reduce prices on items needed by the poor. What most of us forget, however, is that they also demand lower taxes from different taxpayer groups. The income tax code has as many exemptions and special dispensations aimed at different professions for promoting various kinds of economic activity as the expenditure budget. A tax deduction is a dole just like any budgeted subsidy, when it is meant only for a select category of citizens. The standard deduction, which is treated as a right by the middle-class taxpayer, can be claimed only by the salaried — in the eyes of businessmen and farmers, it is another subsidy. The list of such tax benefits is legion. In the 1990s, they were compiled and published as a budget annexure called “Tax Expenditures”. Disgruntled income taxpayers should consult this document to discover the extent to which other citizens’ groups subsidise them.

Cooking gas and foodgrains are priced below market rates for poor families — these account for the big subsidy ticket of the central government. But the free power and water supplied in states like Delhi are available to all householders. In fact, Delhi has a higher free consumption slab than other states. Nonetheless, its resource conservation level is much better because this benefit is tied to mandatory metering. The state has also met its costs through better governance without raising taxes. Cheap power given only to farmers to run diesel generator sets is a subsidy, higher limits for free consumption for all consumers is hardly one.

We cannot complain about “freebies” without asking ourselves what we want from any government. Even selfish individuals want to live in a country full of educated and healthy people, since education and health can make citizens productive and efficient and raise the growth rates for GDP and per capita income. Like any other nation, we must together decide the minimum level of public services that we want for our country and demand sufficient numbers of good quality schools and clinics from our governments. Money spent from the budget on free schooling and healthcare is not a “freebie” when these facilities are available to everyone. And it is certainly a bonus when it comes without additional taxation as in Delhi.

A programme that demonstrates the confused thinking on subsidies is the Delhi scheme for free public transport for women. The debate was acrimonious but not always logical. The decision was perfectly constitutional and legal. It was taken by a duly elected government, which enjoyed a stupendous majority of 67 out of 70 seats in the Assembly and had been voted in with the support of 54 per cent of the electorate — a rare occurrence in a country like India which uses the first-past-the-post system. The decision also met every constitutional requirement, cabinet approval and legislative clearance before it became law. This subsidy benefits women, who are a majority of the voters. It empowers them and increases their participation in the workforce — these are the stated goals of all governments. It is environment-friendly as it encourages public transport and reduces pollution and congestion. It is user-friendly (no IDs are needed) and cheating is almost impossible. And it has been accomplished without higher taxes. What’s not to like about the programme? Those who want the money to be spent in other ways should lobby for a fresh debate in the Assembly.

Let us also launch a debate on every special budgetary dispensation and what we expect from our governments. And let us do this objectively and without bias, accepting the will of the people and democratic political processes and not letting semantics cloud our judgement.

This column first appeared in the print edition on October 14, 2021 under the title ‘The handout myth’. Viswanathan is former Secretary to Government of India in Cabinet Secretariat. She contested the 2018 Karnataka assembly elections on an Aam Aadmi Party ticket

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