Complex System, Poorly Enforced
By Arnold Kling
India’s financial difficulties stem from a badly designed and administered tax system. Rates and rules for personal and corporate income taxes appear reasonable by international standards. Nonetheless, India’s government collects income taxes amounting to only about 3.7% of GDP, about half that in South Korea and the other Asian tigers.
…Cheating occurs because the government hasn’t invested in personnel or in the systems to detect tax evaders, who rarely face jail time and can often bribe their way out of trouble when they do get caught. More subtly, the evasion of “direct” taxes on incomes and profits reflects the mess in the system of “indirect” taxes levied on production and consumption.
A system of complex tax rates, poorly enforced, is perhaps the worst of all possible worlds. Tax reform should aim for rules that are easily followed and enforced.
For Discussion. What are the advantages and disadvantages of administering subsidies directly rather than as tax loopholes?