Whats taxing, whats not

Tax is an essential burden that all citizens have to bear - our contribution for services and amenities provided by the government - the cost of governance, if you will. Unfortunately, the current tax vision (of any government) only aims to increase government revenues, and does not pay too much attention to the changes in behavior that such an universal and important monetary system has the capacity to bring about. 

This piece is not to be confused for a treatise on taxation, but  is instead a general observation on tax through the lens of reward and incentive principles that many of us are familiar with. At last count, there were about 20 different taxes that citizens in India are subject to. Actually speaking, the categorization of these taxes can be done on 4 broad levels (if you like, you can add a couple more), i.e. Value-addition, Transaction, Ownership and Subsidy. Usually, most tax methodologies are designed for ease of compliance and management, and only in the rarest of cases is it used for guiding citizens' actions (as in the case of higher taxes for cigarettes or alcohol - which is more done because they can impose it without expecting protest, and not because they want people to stop smoking or drinking). Or in a manner that conforms to the long term vision of a nation (provided, of course, such a thing exists).

There are several conflicting views on guiding citizens' action, but if the vision and values of the governing authorities for citizens are consistent, then it is distinctly possible to make taxes a valuable tool to encourage right action and thereby guide a country's collective behavior. After all, they don't call taxes the universal leveler for nothing.

Here are three thoughts on how the taxation system could be transformed.

(1) Simplification: The entire world is screaming hoarse about the need for tax simplification. Though there has been no dearth of intention, I assume that simplification may be an avoided path as it makes the tax system too easy and transparent (and therefore, more understandable). It makes the citizens more aware, and sensitive to changes in it, thereby empowering them. However, simplification is a must for experiential wisdom shows that simplification would increase compliance. And further still, it would add the essential thermometer to the tax system, making it more adaptable, and allowing irrelevant taxes or those that have outlived their life, to be changed. 

(2) Vision for taxes: At the broadest level, there could be two bases for taxes. Firstly, the taxation may be based on the degree of government involvement, control, management or (possible) clean-up etc. needed on any product or service. For example, processed foods may have a higher tax level than that of raw fruits or vegetables (with the logic that for processed foods the quality needs to be monitored, complaints need attending to, and it has a higher potential of irregularity than the raw stuff. Also, petroleum, by similar logic could be charged a higher tax as well). At the second level, taxes must be based on the vision for the country, making it a behavior change incentive (more likely a disincentive). For example, for locally grown food material (in keeping with an environmentally conscious vision), the tax would logically be less than for items which are transported from far (even if it is within the same country) Same thing for organically grown food versus GMO. Some may argue that even now there is an indirect accrual of taxes and costs by way of transportation when goods come in from far. This tax, however,  becomes invisible to the consumer by the time it reaches them (and consequently is of no use in behavior change) and therefore the need for the next step outlined.

(3) Communication:  All taxes must be clubbed under 5 or 6 broad headings (four of which are given above) only, and the total and its sub-parts must be made available/displayed on the product or service on which the tax is imposed to give a clear understanding on what amount is being paid and why it is being paid. This then puts the onus of choice on the consumer, thus giving a better clarity on the choices the citizens are making.

If citizens know what we are paying for, how much we are paying and voluntarily make a choice of paying it, (more so in the case of taxes than anything else), not only we be more accepting of our choices, but it will seem less taxing as well.

Seems like an idea.