Imagine a world where there are no Taxes and the society still runs much more happily than it does now. Imagine that in this utopia Inflation is low, Roads, Electricity, Water, Sanitation, Education and Health Care are readily available and citizens are mostly employed in Service Industry be it travel, hospitality, Health Care, Banking, Insurance, Information Technology, Sports or Entertainment. Can such a society really run like a perpetual machine on no taxes?
Well it is not only possible, it is perhaps the right and proper way of doing things. As always we have to seek answers from history to understand how the current models of social organizations came into being. Why taxes were important in the past and why they are no longer so.
Humans organized around leaders whom they called chiefs, princes, kings, sultans and what not. These rulers provided cohesiveness to society by framing do's and don'ts, maintaining law and order and protecting people from agressive outsiders. For these services they collected taxes and spent the surplus on patronizing arts and entertaining themselves.
With time, these societies acquired mass, establishment costs got bigger and so did the taxes. Elaborate mechanisms for revenue collection backed by armed force were designed, more enterprising chieftains used the surplus accumulations as war chests and launched military campaigns to enlarge their dominions which in turn increased their tax base and potential for further invasions.
When the rulers were not thinking about invasions, they were thinking of ways and means of increasing their revenues which mostly meant increase in rates as in the primarily agricultural economy, farm productivity was more or less stagnant and so was the GDP for all practical purposes. The vast majority of the population lived at subsistence level and could not hope to improve their lot as entry barriers into higher classes or castes in a frozen socio-economic structure without improvements in productivity were just too insurmountable. In times of natural calamities like famines, floods or earthquakes, the rulers did support their subjects and helped tide over the bad times mostly in their self interest to ensure that the cosy system with guaranteed rents did not break down.
In some parts of the civilized world this system came under strain and even lead to rebellions followed by grudging grant of some freedom, in others constant external invasions did not give sufficient time to the masses to organize protests and therefore the modern industrial age found these societies quite unprepared for the opportunities that the new economic dynamism threw up. India is one such example. The general population still looks to the Government with a sense of abject dependence and the Government looks at trade and industry primarily as a source of tax revenue without having to give anything in return.
The twist in the tale is imported Democracy. To get voted, the politicians have to tax the rich trade and industry and transfer the meager collections to poor masses whose expectations are not very much higher or ambitious especially from the longer term investment perspective. It is logical as for someone dying of thirst it is infinitely more sensible to somehow quickly gain a right to share from someone else's water bottle than to think about investing in digging a well.
The problem is not the basics. It is okay to transfer wealth from the haves to the have nots on the margins of existence. The issue is the perpetuation of a system where social and economic mobility is a victim to compulsions which need not be. It is well known that only 15% of the funds actually go to the intended beneficiaries. Rest are soaked up by the bureaucracy and the delivery channels. At this rate neither will all the thirsty quench their thirst, nor shall any one dig a well. Can this be corrected?
On the face of it, it ought to be a cake walk. This country gets much more rainfall than the developed west. The strong sunshine and short or no winters mean more crop cycles in the year. The soil is almost ideal for cultivation. With modern nutrients, pesticides, irrigation methods, seed varieties and knowldege inputs, this land could easily provide food security to a population several times the current numbers. Only a tiny fraction say 5% of the employable work force can achieve this and the rest can lead a healthy and interesting urban life. It is bizzare that we just don't get it.
We can keep trying but there are even more fundamental issues. The Governance structures of democracies were invented in ancient Greece and Rome as a deep reaction against despotism. Heriditary monarchy was abandoned in favour of elected representatives by the relatively small franchised sections of the populations. In the modern version, the entire adult population is franchised with the principle of one person one vote being strictly followed.
In the original scheme of things, it was envisaged that elected consuls would have been successful achievers in their vocations be it as professional soldiers, philosophers, teachers, landlords or whatever. The modern version especially in India obviates this pre-requisite. Politics is a vocation by itself. A typical politician has no other dependable source of livelihood and in the intensely competitive jostling for power, the expenses are mandatorily very steep. So how does the political class balance the economics of career politicking?
Simple enough actually. The entire machinery of the state is geared to directly or indirectly contribute to the revenue streams of the political class. That the bureaucracy is a more than willing accomplice is only natural as their's is a truly symbiotic relationship where one needs the other for survival and prosperity. The opaqueness in the laws, the poor implementation and execution in all initiatives, the low accountability, the rampant corruption, the constant pitting of one section of population against another are all designed to make it easier to channelise monetary resources towards the political careerists.
It is indeed very apparent that in a free flowing global economic village, capital liquidity will quickly find its way to service areas of deficient investments as the returns there would be the highest. This will eventually happen as the momentum of global transformation and integration is too great to be resisted by the political class of any one region. However the unstoppable will be delayed as much as possible and the fruits of modernization will be tantalizingly visible but just out of reach to the masses for some generations to come.
Some will argue that the East India Company experience was not good for India. People with control over capital and technology would exploit in their own novel ways and even reduce the entire nation to second and third class ethnics. Did the East India Company and the English really leave behind such a sour experience that we would rather grow slowly than risk renewed subjugation .
We have to examine the context in which all that did happen actually came to pass. Europe was rapidly industrializing and India was civilizationally behind when the English came here. It was not the case of some semi nomads from Central Asia conquering a more developed civilization and in the process getting assimilated but a more developed, educated, competitive and competent society taking control of a relatively backward country. Naturally there was no question of getting assimilated in this context and the ethnic aloofness was only to be expected.
The proof of this is in the fact that those sections of Indian society that grabbed the opportunities, took up the challenge and educated themeselves or established trading relations with British Institutions were treated much better than the rest. The modern Indian Bureaucracy and Industrial community is an offspring of that cohabitation.
It is safe to assume that the vast majority of services provided by the state through the governmental systems are invented more for the benefit of the providers than the recepients. We have greedily joined the bandwagon of the welfare state philosophy which works in the west without pausing to assess the capacity of the state machinery to deliver transparently. It is not only a prioritization blunder, it is a scale problem and it is a distribution issue as well.
How can anyone in their senses channelize scarce revenue collections to subsidize urban water, sanitation, electricity, road transport, rail travel, metro rail and university education, when a huge proportion of the rural population is living at the edge of subsistence and does not know where the next meal for severely under nourished pack of squealing kids would come from. It would seem common sensical to first ensure basic minimum calories to all and for the time being leave the rest to efficient market forces.
It is quickly evident based on simple math that given the resources available to the government, it is not economically possible to provide all these so called basic amenities to the full population of the country. Therefore there is even less logic to provide these to relatively better off sections living in cities and towns. It is not that there is any great compulsion to distribute these freebies and that there would be a mass rebellion if the services were to be withdrawn. The real motivation is that the management of the ditribution of these services provides the poltical and bureacratic structure an opportunity to earn a decent living.
The political class would have us believe otherwise. In our anarchical and chaotic adaptation of Democracy, political representatives are permitted to vociferously protect and advance the interests of their constituencies. It is just that the constituencies happen to be the more vocal and organised sections of the population. It is just not possible for the widely dispersed starving masses to organise themselves and prevent the Government frittering scarce funds on a glittering air conditioned Metro Rail for the pampered residents of the Capital. The unwitting media propaganda machinery would have us believe that it is a great investment idea. If it were indeed so then why would the government need to invest anway, any Venture Capital fund would want to participate in such an opportunity.
The other screaming need is to focus on the distribution capacity of the state's machinery. Every small or large commercial organization understands that it cannot service all its customers directly and builds independent sales channels which require little day to day management, even though this entails sharing a large percentage of revenues with the business partners. However the mamoth government which has to serve a huge population, insists on doing everything directly. It runs water and electricity services, it runs most universities, it has municipal sanitation departments, it has the public works department for roads, it runs the railways and the metro rail, it runs health services and postal services, besides the usual law and order and justice dispensation which it keeps making more difficult to administer by introducing new rules with exemptions every now and then.
No one has laid down the service levels that each of these services is expected to deliver and therefore no one is sure of the corresponding resources required to meet those service levels. It someone were to objectively analyze, it may well be discovered that the state needs a hundred times more policemen, a thousand times more judges and so on even if they were all very knowledgeable, competent, highly motivated, hard working and incorruptible.
To be able to manage the stupendous distribution tasks effectively and efficiently, the state would have to strictly limit its role to the basic minimum. It would seek to create independent channels for delivery and just provide the catalytic inputs like acquiring land, guaranteeing right of way, laydown a broad framework of do's and don'ts or help instituting a regulatory mechanism and so on. This is also the most reasonable thing to do as channels for delivery can then be made to run on market principles and the state may actually earn revenue instead of spending on these services.
The analogy with a start up business is apt. When a new business is commissioned, it is best to deploy the scarce capital on the core or essential functions and outsource everything possible. It is not good prudence to start with all upstream and downstream activity inhouse. Similarly a newly formed state with a paucity of resources would do well to concentrate its meagre capabilities and capacities on the bare essentials and leave the rest to market forces which can then be tightly regulated with little incremental effort. Regulation is far easier when the refree is not an interested party or even worse a player. Tough competition laws would cost far less to implement and do much more for fair pricing than stradelling a large part of the market through public sector agencies.
Municipal amenities like water, electricty, sanitation, mass transport, for city dwellers need not cost the government a single rupee. These services can easily bear user charges. Municipalities at present get funded by state governments who in turn receive a share of central tax revenues. Municipalities desperately need to become self sufficient. It is paradoxical that the cities are the centers of value and wealth creation in any modern society, but in the current setup are not able to monetarily fend for themselves. With huge concentrations of consumption potential, cities are a marketer's paradise for providing services to residents at much lower costs than to a dispersed population in the rural hinterland.
If we can find a way to move our population to the cities, urban services can be easily left to the market. Only common goods and services like non Toll Roads, Law and Order and Defence need to be funded through non market mechanisms. If we look at the deficit published in the annual budgets, the quantity of extra money that is printed and thrown into circulation by the RBI is much more than sufficient to cover these essential expenses. Indeed a little imaginative handling of the Law and Order infrastructure could possibly convert that arm of the Government into a net revenue earner. We just have to look at the ridiculously low fines and penalties provisioned in the law which have no relationship to the financial capacity of the violators. This needs to change immediately and the principle of pain of penalty being constant through all the income and wealth strata should be strongly and truthfully executed. Looking at the pervasive and pandemic economic offenses that are second nature to most citizenry it would not be surprizing if the collections generated by this channel are sufficient to provide food security of not only bread but butter and jam as well for all the vulnerable masses. This would be a good reason for a unique PAN number and income tracking system to be more vigorously and faithfully implemented.
It is easy to see that if and only if most citizens could move to cities, markets could effectively take over the role of providing nearly all present and future services and therefore all taxes could be abolished without fear and society would still survive, perhaps more happily than now and this would be even more applicable to those at the margins of subsistence.
How do we move people to cities? Not very difficult really. We first need to accept that people engaged in agriculture are really adding little value to society as what they produce as output can easily be done by less than one tenth the number. Theoretically they are under employed to the extent of 90% of an average productive worker in any industry. It is not really fair to them because there is no way they can pay for and enjoy the fruits of modern civilization like running water, power, sanitation, latest electrical and electronic gadgetry, education, travel, entertainment, sicialising, fancy clothes and good housing.
The potential for getting gainfully employed derives from productivity and creativity arising from division of labour which can only happen economically when critical mass is reached for each specialized activity. This pretty much lays down the imperative of living and working in cities unless newer technological developments make telecommuting and virtualization a reality and people can live far apart but work together. For the present we will assume that those futuristic scenarios are some way off and people will have get concentrated into crowded cities before they are able to disperse back to a well connected countryside.
It is however true that cities are much more resource intensive per capita and therefore much more money supply would need to be in place. The good news is that even low skilled, uneducated people who can only add value through physical activities can easily work their way through this transition if they have a place to live in the city. This is where the crux of the problem lies. Why do homes cost a fortune compared to the average income of a household?
The cost of bare construction for a one room tenement with electricity and sanitation would not be more than 50,000 rupees on which the viable monthly rent should be about 500 rupees. This would be easily affordable to an unskilled labourer. However in real life this accomodation would cost ten times as much and the labourer would be forced to look for a place in some slum built on encroached public land. What is the catch?
The difference between the cost of construction and the cost of the tenement is the cost of land which is driven sky high by artificially restricting supply through complex laws, huge corruption payoffs by colonizers all the way up to the highest levels in the political heirarchies, ridiculous building density restrictions, insufficient commercial floor space forcing the spillover to residential areas and subsidised amenities which get factored in by the market.
However this should not surprize anyone. We have to come back to the democracy problem. It costs a lot of money to successfully run an adult franchise based political career, there are no legitimate returns available, the only way returns on investments can be assured is by creating an infrastructure for illegitimate payoffs and the property business is the domain where an average politician has some skill. Therefore builtup property supply gets artificially restricted, masses of unskilled villagers happily willing to do any physical work cannot afford to shift to cities and are forced to stay on in the rural hinterland where they remain hugely underemployed and therefore their earnings remain abyssmally low.
Now let us look at how the politicians tell us they would solve the problem. Prevent people from migrating to cities. Move industry to villages through tax incentives even though it is not economically sound to do so, provide amenities like roads, water, electricity, schools, health centers to villages at high capital cost and then not be able to recover user charges because of the low income of these consumers in any case precludes that. It is a self defeating exercise though it sounds good to the deprived masses the same way that Robin Hood robbing the rich and doling out some food to the hungry appears a blow for justice without actually solving the problem structurally.
Some would argue that even if politics could be run without investment and returns on investment considerations, people in power would still want to make money out of sheer human greed, get richer and gain economic status, even try and provide for their future generations. So why harp about motives for generating illegitimate funds?
It is just that the investment and returns issues in political careering impart a convoluted and perverse moral legitimacy to the business and the whole ecosystem surreptitiously colludes in the ensuing recovery of money spent. The system of checks and balances completely breaks down when moral force is absent. At the higher levels of the political executive heirarchy, one politician is really and practically accountable to only another politician and this doesn't work because as Gandhi would have said both are having their hands in the till.
As India modernizes and liberalizes under the pain of International obligations, the balance of power is shifting to the market and we are seeing the momentum gathering steam. Urbanization is happening, populations are shifting to cities even if they have to start out in the slums. Globalization is forcing rationalization of laws and business rules even though all smart Finance Ministers are quick to claim credit and in the process help their political parties lose the next round of elections.
The force of technological advancements is sweeping the Global with such power that no individual nation and its politicians can escape for long. Change will happen, the only issue is that it will happen with pain and cost to those who will not get enough time and support to adapt. At the end of the day it will be survival of the fittest in the jungle.