Tuesday, August 13, 2013

Taxes and Subsidies : A vicious circle.

When I was a child, I had often wondered, why do we have taxes?

I mean, my mother and father went to work all day and earned their salary in an honest way. Why should they give the government a large chunk of their earnings?

One day, my doubts were cleared by an elderly gentleman who had the patience and the time to do so. He told me that we payed the government so that we have roads, electricity, water and other such resources. He said we paid taxes so that the government can give food to the poor people at a cheaper rate so that they could also fill their stomach.

As a child, I was unconvinced. I did not know why but the explanation just did not set with me.

When I grew up, I realised that tax money was used by government in giving subsidies to the poor as well as providing everyone with basic amenities.

So, government took money from parents. Decided on what schemes to use that money on. Used the money for people who needed it. Problem solved!

So, to simplify it, government did charity on my behalf.

Now, what I don't understand is, why do we need the government to do this?

I mean, if I really want to or have to help someone, why can I not decide whom to help and how to help them?

I do not agree that just because some people are rich, they have a duty to take care of everyone that is poor. I believe that everyone should get what they deserve for their work. Please read my post on The Robin Hood Concept for more details on this.

In the current scenario, the government is spending a lot of money in collecting taxes. After that a lot of money is lost on schemes which have good intentions but are implemented poorly. Not to forget the major share of corruption in 'redistributing' the money.

So, I have to pay only Rs 400 for a job to my maid because she is supposedly getting benefits from the government and so can manage on a meager salary. I have to give 30% of my income to the government so that it can provide these benefits to my maid.

Unfortunately, all the money that I give to the government, hoping that it would reach my maid, does not reach her. Some is lost in administrative expense. Some is lost in mismanagement and the lot of it goes to corrupt 'distributors'!

Instead, why can't I just pay my maid more and pay less taxes?

In this way, I will be paying my maid exactly what she deserves based on the price decided by market forces. The government will not have to collect money from me and give it to my maid. And my maid will get what she is entitled to for her work. Doesn't it simplify the entire process?

It not only makes it more efficient but also a lot more reliable. Plus, because I get to choose where my erstwhile tax money is being used, I cannot complain that the government is wasting my tax money.

Ofcourse this cannot be done overnight. The reduction in taxes and subsidies has to be simultaneous.

The only way to reduce corruption is to improve the moral fabric of the society but till then we must work on reducing the number of opportunities where people can be corrupt.

If we increase the subsidies, more and more people would want to be in the group which is entitled to these subsidies thus defeating the entire purpose of it.

Let us focus on creating wealth before we start redistributing it. 

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