Faster, easier and secure gateway to e-file income tax return

Taxes and Economy: Growth vs Development

24/Nov/2017
Taxes and Economy: Growth vs Development

Governments across the globe are trying their best to attain long term growth and economic development with taxation as one of their major weapons. It was reported in early 2017 that India’s growth rate overtook China’s. When we talk about any development or growth it must be measured in terms of the maximization of the welfare function for society in the aggregate …

The government receives revenue for expenses it incurs in achieving policy objectives, asset maintenance and debt realization through both direct and indirect taxes. Did you know that personal income tax rates in FY 1974-75 were 97.75% for the highest slab?

This was a result of the need to meet commitments through “revenue consolidation”. This is neatly summarized by the Laffer curve shown below:

The laffer curve

WHAT IS ECONOMIC GROWTH?

Economic growth is an increase in the ability of an economy to produce goods and services, when compared to one period of time in the past. It is generally measured in terms of Gross Domestic Product (GDP), being the value of all goods and services produced in the country. There are other scales as well, but this is the most authentic and easy to understand.

WHAT IS ECONOMIC DEVELOPMENT?

Economic growth is a bit different from Economic development. Economic development is the growth in the standard of living of the people of a country…When poor people grow into a rich country, then this growth can be called Economic Development. When there is improvement in the quality of life of the citizens of a country you can call it economic development.

When we talk about Economic growth and development, we must also be familiar with some important terms, being: -

  • Gross Domestic Product(GDP)
  • Human Development Index(HDI)

GROSS DOMESTIC PRODUCT

GDP is one of the commonest ways of measuring a country’s economy…GDP is basically the total worth of everything produced by all the people and businesses within a country. So long as the individual or firm operates in India, its output is counted in the GDP.  

The Central Statistical Office under the directions of the Ministry of Statistics and Programme Implementation gathers data and computes the GDP for India.

Those who equate GDP growth rate with development often argue that increases in the national income will mean higher tax collections for the government which can then be used for increased welfare expenditure. If the income of the nation increases wouldn’t it mean higher consumption and higher incidence of tax resulting in higher fiscal strength to meet contingencies?

HUMAN DEVELOPMENT INDEX

This measure was originally conceived by Pakistani Economist Mahbub Ul Haq.. Accordingly, HDI is a composite statistic of education, life expectancy and per capita income which is used to place countries in one of four levels of Human Development. A country scores high on the HDI scale when the education level, lifespan and per capita income of all people on the average is higher. Disaggregated values of the HDI based on race, ethnicity, gender, age, region and/ or class gives us a better picture of the state of development of people in the country.

As with the GDP growth rate, the HDI has its limitations.

  • For one, statistically speaking, certain assumptions are made in creating the composite index failing which interpretations of results may be distorted.
  • Secondly, HDI is reflective of long term conditions and not of short term policy.
  • Thirdly, national income appears indirectly in calculating this set of numbers.

The question that is not addressed is whether these numbers actually show how much of national income is being received by all classes of people.

This writer is reminded of this beautiful piece by Leonard Cohen:

Everybody knows that the dice are loaded

Everybody rolls with their fingers crossed

Everybody knows the war is over

Everybody knows the good guys lost

Everybody knows the fight was fixed

The poor stay poor, the rich get rich

That's how it goes

This information is provided to you in the public interest courtesy of AllIndiaITR, a product of Corwhite Solutions Private Limited.