Black hole of public finance: Unequal fiscal burden on citizens

Context

in the form of inflation and higher taxes, with fewer benefits.

Economic inequality in India impacts every aspect of the citizens’ lives, despite the country being a welfare state.

Idea of ‘Welfare state’:

A welfare state is based on the principles of equality of opportunity, equitable distribution of wealth, and public responsibility for those unable to avail themselves of the minimal provisions of a good life.
Social Security, federally mandated unemployment insurance programs, and welfare payments to people unable to work are all examples of the welfare state.

About

About India’s economic Inequality:

Oxfam observed in its 2021 report that 73 per cent of the wealth generated in India in 2017 went to the richest one per cent, while 670 million Indians, who comprise the poorest half of the population saw only a one per cent increase in their wealth.
The recent State of Inequality in India Report concedes that while earnings have risen over the years, the benefits of that growth have largely remained concentrated and this has marginalised the poor further.
- A 4% wealth concentration in the highest quintile in urban areas is contrasted with a meagre 7.1% concentration in that in rural India.

Reasons for economic inequality:

The relationship between the state, citizens and taxation revolves the process of transferring economic burden on common people.
Other reasons include;
- Failure of Labour Intensive Manufacturing in India.
- Jobless Growth in India.
- Regional and Inter-state disparities.
- Lack of skill development.
- Rigid social institutions like Caste.
- Tax Evasion- undue concentration of incomes in a few hands.
- Regressive Tax- indirect taxes give maximum revenue to the government.
- Unemployment and underemployment and the consequent low productivity of labour.
- Failure to develop Export oriented industries.
- Corruption

How Taxation impacts the poor?

Whether taxes reduce or increase income inequality depends on the ‘nature of taxes’, i.e. Progressive or Regressive.
- A steeply progressive taxation system tends to reduce income inequality since the burden of such taxes falls heavily on the richer persons.
- But a regressive tax system increases the inequality of income.
Reduce disposable income of citizens: Imposition of taxes results in the reduction of disposable income of the taxpayers.
- This will reduce their expenditure on necessaries which are required to be consumed for the sake of improving efficiency.
- As efficiency suffers ability to work declines. This ultimately adversely affects savings and investment. However, this happens in the case of poor persons.
Less investments and savings: Since rich people save more than the poor, progressive rate of taxation reduces savings potentiality.
- This means low level of investment. Lower rate of investment has a dampening effect on economic growth of a country.