Tax Freedom Day

Author: Parth J Shah
Publication: Economic Times , 18 April 2001

Nothing in life is more certain than death and taxes. Death however comes once, taxes every year. How many days of the year an average citizen works to pay for government expenditures? When does he become free from being a slave to the government? Tax Freedom Day (TFD) is the day you stop working for the government and start working for yourself. It refers to the number of days one has to work to pay off the taxes. During the years 1980 to 2000, it has varied between 65 days (1980) to 80 days (1987). In other words, people had to work from January 1 to March 5 (1980) and to March 20 (1987). The Tax Freedom Day for the year 2000 was March 14 (74 days).

THE CHAINS OF TAXES SLAVERY

Year Tax Take per capita (Rs) TFD GE Burden per capita (R) FGD
1980 292 MAR 5 558 MAY 3
1986 643 MAR 19 1303 MAY 8
1987 723 MAR 20 1399 MAY 3
1988 831 MAR 18 1571 MAY 28
1989 945 MAR 19 1766 MAY 27
1990 1046 MAR 16 1951 MAY 21
1991 1206 MAR 18 2172 MAY 20
1992 1309 MAR 16 2338 MAY 14
1993 1369 MAR 9 2611 MAY 11
1994 1628 MAR 11 3005 MAY 10
1995 1891 MAR 12 3275 MAY 4
1996 2132 MAR 12 3643 MAY 3
1997 2222 MAR 11 4092 MAY 9
1998 2487 MAR 12 4751 MAY 17
1999 2919 MAR 13 5605 MAY 20
2000 3217 MAR 14 5965 MAY 16

TFD=Tax Freedom; FGD= Freedom From Government Day, TAX TAKE= Total Taxes Collected By All Levels Of Government (Centre, State And Local) GE BURDEN= Government Expenditure By All Levels Of Government( In Current Prices)

The government collected tax of Rs 292 per person (that is, per child, man, and woman) in 1980 and of Rs 3217 in 2000 (in current prices). Tax Take includes all direct and indirect taxes at all levels of government (centre, state, and local).

Indirect taxes constitute a greater proportion of government revenue, though the share of direct taxes has been increasing over the years. Tax on income is the most important direct tax. Income tax was first introduced in 1860, reminder from Queen Victoria that India had been transferred to the Crown from the East India Company. The 1860 income tax act expired in 1865, and the next act was not introduced for twenty-one years. The Income Tax Act of 1886 exempted agricultural income, a practice that we still follow. The current income tax act is of 1961 vintage.

Government can spend more than the taxes it collects. It can borrow or print money to finance the expenditures above tax revenues. In 2000, for example, central, state and local governments collected Rs 3217 in taxes but spent Rs 5965 per person. The government spent 54 percent more than its revenues. In 1986, the Tax Take was 22 percent of Net National Income, but Government Expenditures were 44 percent; it spent twice the amount of tax revenue. The difference is made up primarily by borrowing or printing money. Just as taxes, the costs of government borrowing and printing is finally born by the people. The government debt is ultimately paid by taxpayers. The cost of printing money falls on all citizens. The new money printed to finance government spending leads to increase in prices of goods and services. The rise in prices lowers the purchasing power of money that people possess. People would be able to buy lesser quantity of goods and services than they would have at the old lower prices. This is known as inflation tax. It is an indirect tax where the government increases its spending not by taking money from the people (either as tax or by borrowing), but by lowering the purchasing power of money that people hold. The government acts like the animal that sucks out yoke from the egg but keeps the shell intact. By borrowing and printing money, government can spend more than the current tax revenue.

A fuller picture of government burden on the citizenry should focus on total government expenditures. Central, state, and local governments spent Rs 558 per person in 1980 and Rs 5965 per person in 2000. To pay off the government expenditure burden, a person would have to work 125 days (or up to May 3 from January 1) in 1980 and 137 days (or up to May 16) in 2000. An average citizen worked for four and half months to pay for government expenditures in 2000.

During 1980-2000, the earliest Freedom from Government Day (FGD) was May 3 in 1996 and the longest was June 8 in 1986. The two extreme years are 1986 and 1996, a coincidence that highlights the governing philosophy of those two decades. The years 1985 to 1992 have been the most profligate—the high tax and spend years. For 2000, the Tax Freedom Day for USA is May 3 and for Canada June 29. Compared to these, India’s TFD of March 14 seems like a tax heaven. But this hides the fact that the link between tax revenue and government expenditures is tighter there. In India non-tax revenues constitute a sizeable proportion of the overall loot. The total government expenditures therefore give a more realist picture of the cost of government in India. And the Freedom from Government Day is May 16, a date right in the middle of USA, an apparently laissez-faire state, and Canada, a welfare state. We haven’t yet abandoned the middle ground; Narasimha Rao can sleep easy. (For more information on US and Canada, check www.taxfoundation.org and www.fraserinstitute.ca. And have fun at www.taxslaverysucks.org.)

Kautilya’s Arthasastra, which in my opinion is a work on public finance and public administration, and not really on economics, regards revenue and taxes as the earning of the sovereign for the services rendered by him to the people, offering protection and maintaining law and order. The relationship between the king and his subjects is based on dharma, and it is king’s sacred duty to protect his subjects in exchange for tax revenues. And if the king failed in his duty, says Kautilya, the subjects had a right to stop paying taxes, and even to demand refund of the taxes paid.

What services we citizens get in exchange for our taxes to the government? Isn’t it time to demand a refund?