28 Jul 2016

Taxes Should All Be Automatically Deducted

Filing my tax returns reminded me of the unnecessary complexity of the tax system.

One solution is to simplify taxes: get rid of capital gains tax, securities transaction tax, dividend distribution tax, commodities transaction tax, and so on. Maybe get rid of income tax, since it generates little revenue for the government.

A second solution is to make sure taxes serve some socially important goal, like reducing pollution or traffic congestion, by taxing those activities. Then paying taxes won’t feel like pointless bureaucracy.

A third solution is to require all taxes to be automatically deducted. Individuals shouldn’t have to account for or pay any taxes. For example, dividend distribution tax and securities transaction taxes are fine, since they’re deducted automatically. You don’t have to track them or pay them when you file your returns. Taxes that impose bureaucracy on you should be fixed. For example, require mutual funds [1] to withhold capital gains tax for you. Or get rid of capital gains tax. Likewise, income tax should be paid only via TDS [1].

Pass a law saying that individuals needn’t explicitly pay any taxes, unless they break like law like quoting someone else’s PAN number. Otherwise, they shouldn’t have to track anything, pay taxes explicitly, or file returns. Whatever they owe gets deducted automatically. If something doesn’t, they don’t need to worry about it. This would be a great simplification of the current mess.

[1] And stockholders and other intermediaries.

[2] Yes, this lets self-employed people escape income tax. That’s fine. Eliminate bureaucracy, rather than worrying about every last rupee of tax revenue. Or eliminate income tax for everyone.

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