It is possible that the imposition of a high tax burden on the formal sector may create more informality in the system, reads a note of caution in ‘The Outsiders: Economic reform and informal labour in a developing economy’ by Sugata Marjit and Saibal Kar (www.oup.com). The tax burden intended for redistribution may be so high that those in the formal sector get dissuaded from working, the authors reason. “They may choose to become net recipients by switching sides, drying up the tax base in the process.”
An insightful section in the book discusses two instruments in the hands of the government for redistribution – tax and governance. A relatively weak governance structure allows for extensive informality, which helps the poor but hurts people with tax-paying capacity, whereas strong governance protects legal tax payers but increases the possibility of social unrest as the incidence of poverty and inequality increases, the authors explain. “The cost of sustaining governance is financed by income tax.”
The essay goes on to discuss how there is a reasonable case for strong governance and high tax for those societies experiencing lower incidence of poverty and lower income inequality, whereas in societies with high incidence of poverty and income inequality, the level of governance is chosen to be weak, and the income tax rate is lower. “If the government perceives that the effect of the tightness and rigidity in the level of governance on the informal income is not very strong, then also it might choose a relatively higher level of tax rate and regulatory controls.”
ADVERTISEMENT
**
BookPeek.blogspot.com
ADVERTISEMENT