Apropos “A fully taxed nation” (February 25), I found the piece informative but weak in its arguments. The author breaks up GDP into two parts — GDP of the formal economy that is generated by tax payers and an informal economy GDP that is generated by low-income individuals who don’t pay tax. This leads to the assumption that a sizable portion of GDP is generated by the informal economy (and non-payers). Are we not mixing things up here? In poor countries, non-payers make up almost the entire population, but the informal economy in itself constitutes a near-negligible fraction and cannot serve as a valid basis to expect a lower tax-to-GDP ratio from poorer nations.
Alternatively, one can use a better measure to compare tax-to-GDP ratio across all nations — “tax-to-formal-economy-GDP” ratio. Even if the informal economy GDP were substantial, it will not be able distort figures through a larger denominator effect. This will show that tax payers in poor countries are paying lower tax in proportion to the formal economy GDP over which they preside. Thus, the problem lies in compliance. A better contextualisation of the low tax-to-GDP ratio in poorer nations might be provided by the following reasons:
- They have limited enforcement capability.
- A feudal outlook because of which cronyism and clannish behaviour are considered normal.
Rohit De Kolkata
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