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Micawber's folly

IT IS A long held view that you can be content only if you spend less than you earn. Hard though this might sometimes be, living beyond your means is a sure prescription for disaster. These things may seem obvious, but the real world marches to a different drummer. Only those who spend a great deal more than they earn can live the good life. One obvious example is the case of a family which decides that, on the basis of its present income, it simply cannot afford to borrow money to buy a car or a house; only to find that as time goes on it gets left further and further behind another family which nevertheless decides to go ahead and do so. The happy ending does not always materialise; there are exceptions. But in any case borrowing to build future assets is not the main source of the striking disparities that often exist between families that ostensibly have about the same level of income. Under-reporting of income too may not be as major a cause as it is sometimes made out to be.

The basic reason is rather that while even basic expenses of salary earners who are subject to deduction of tax at source are treated as income, the better off amongst the `self-employed' are officially allowed to treat as an expense a large portion of the money that they use to maintain their high or even lavish standards of living; as for example the money spent for `business purposes' on houses, cars, fuel, books, computers, travel and errand boys. Indeed, the story does not end with this, because these people also in effect get a refund of any indirect taxes that may have been paid by them while spending money on such items; because expenses `eat into' their profits, and therefore their taxable income.

Under these circumstances it is odd that the Kelkar Committee Report on Direct Taxes, while recognising that ideally personal income tax should be based on the standard of living or quality of life, does not have a single word to say about the problem caused by this blurring of lines between income and expenditure; which not only goes against the basic rules of fair play, but also causes revenue leaks that far exceed those that are caused by deductions or rebates on some forms of saving and investment. Besides, since such `sops' are available only up to a certain limit, it is the middle classes who will be most adversely affected by the elimination of such `loopholes', while benefits from the accompanying `rationalisation' of tax rates (while thoughtfully giving some real relief to the poor) will, as in the case of George Bush's schemes, accrue mostly to the rich.

It is also disturbing that the Report takes the position that the personal income tax regime should be devised in such a way as not to interfere with the `natural' allocation of savings between the various options that are available; or affect the allocation between savings and consumption. Even if revenue were the sole purpose of taxation, `first best' solutions are hardly ever the best choice in `second-best' situations. At a time when there is such a serious debate going on about setting up funded pension programmes, it is absurd to be so finicky about disturbing the choices that would normally be made by families between consumption and saving. Similarly, it is the height of irresponsibility to adopt an attitude of indifference in respect of the way families allocate their savings; at a time when the Government is desperately gambling on jacking up the stock market by fair means and foul among other things by reducing both the rates of interest and tax benefits that have hitherto been available in respect of relatively safe avenues of investment. Do we really want desperate and gullible investors to once again fall over each other in their eagerness to entrust their nest eggs to adventurers?

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