I, Dipankan

Contradicting sense: Taxation and Development

Is there a relationship between development and taxation rates imposed by a regime? The short answer is yes, and that is a curious case of a U-trend!

On plotting a dataset of 146 countries against their HDI Index (2018) with personal income tax rates, their parabolic relationship becomes clear: While those with lower and higher taxation rates did well on the HDI front, rates put in the median bracket fared poorly. India, too, is in the median bracket. There can be several reasons for such trends. One possible way is to see why regimes impose tax on the populace in the first place. A high tax rate converts into high revenue stock for the government to spend, and hence development need not wait. Countries that put a low tax rate (primarily Islamic countries in the Middle East) have carved out State funds for purpose of welfare spending instead of putting up high-interest rates. For example, Arab states depend heavily on their oil earnings, and taxation only accounts for a lowly percentage of the GDP (Arab states had 5% of their GDP in 2002 as tax collections).

The median bracket is a paradox. Moderate rates should propel the nation towards development, but data proves otherwise- those with moderate tax rates have the lowest HDI scores on average. Perhaps, a stagnation in the tax rates for long has diverted State attention to other aspects of governance, leaving actual ‘vikas‘ behind. With #LokSabhaElections on the prowl, it would be interesting to see if the party that forms the next government will increase, albeit marginally, tax rates to help combat deficits that may arise- and in the process, push the marginalized out of their state of despair!

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