1% of Indians pay income tax

The BBC’s Justin Rowlatt wrote that India published income tax data this year showing that only 1% of Indians paid tax in 2013, while 2% filed a tax return. He quoted Indian Prime Minister Narendra Modi saying:

publishing the data was a “big step towards transparency and informed policy-making”.…Just six individuals were in the top-earning tax bracket – declaring an average income of $10.4m (£7.1m). However, India has at least 84 billionaires, according to Forbes magazine, suggesting a huge shortfall in the amount of income tax paid by the very rich in India.

This amount of tax evasion is a symptom of the pervasive corruption in India. So much of the economy is below the table using cash to avoid taxes that the government announced a few weeks ago that it banned 86% of the cash in circulation! This economic experiment isn’t going well so far, but it is a massive problem and if this really solves it, then it could be worthwhile.

Imagine if only 1% of Americans paid taxes on their income. Although only about 50% pay what we traditionally call the “income tax”, all Americans who get a paycheck pay a tax on their income that is also paid to the IRS that we call the payroll tax even though it is just another kind of income tax. If only 1% of Americans paid these taxes on income, we would have no Social Security and Medicare. The defense budget would be shrunken to… well to the kind of amount that India can afford; a tiny fraction of the amount that America spends, and every government program would have to shrink, from education, to police to road maintenance.

Although these kinds of cuts would be very unpopular politically, it would produce a libertarian paradise for the 3% of Americans who voted libertarian!

Recently the world has been becoming more like India.  Gabriel Zucman’s research produced this estimate:

Oxfam found that “Corporate tax dodging costs the US an estimated $100 billion each year, a gap that the average American taxpayer would have to shell out an extra $760 to cover”.

As Matt Yglesias points out, the US State Department routinely pressures foreign government to obey the interests of powerful American interests, but it isn’t in their interest to clamp down on global tax evasion:

American negotiators typically put a high priority on inducing foreign countries to changing their domestic laws to more closely conform to US practices and the interests of big US-based firms.

America’s bilateral trade promotion agreement with Panama is no exception to this, with the US Trade Representative’s Office touting “important disciplines … related to intellectual property” that are included in the agreement.

Tax enforcement is a low priority

As part of the negotiation, the US did also reach a bilateral tax transparency deal with Panama that will make it somewhat easier for the US Treasury Department to catch egregious cases of illegal tax evasion using Panamanian shell companies. But these tax information exchange agreements are relatively weak tools. As IRS Commissioner Douglas Shulman has explained:

“This is not to say that treaties and TIEAs are some sort of silver bullet; they have their shortcomings. It often takes a long time to get the requested information from partners; and …you may have to jump through a lot of hoops to get the information you need.”

This isn’t nothing. But it falls well short of what trade deals normally demand of US partner countries in terms of legal reforms to protect multinationals’ intellectual property, or the way domestic legal processes are circumvented to protect American investments abroad.

The nature and extent of global economic integration is deeply driven by elite priorities, and cracking down on tax evasion isn’t that high of a priority.

In the specific case of Panama, it’s worth recalling that back in 1989 the United States sent a small military force to invade Panama, depose its president, extradite him to the United States, and put him on trial for drug trafficking charges. If there were a strong bipartisan consensus in favor of coercing Panama into changing its laws regarding taxation or shell companies, we could get the job done.

The Panama Papers provide more evidence that elite tax evasion in offshore havens hasn’t been a priority of elites in government.