Why Govt Loves Income Tax and Isn’t Going to Scrap It

One suggestion that I see people constantly make on the social media, particularly on Twitter, is that the government should do away with personal/individual income tax. They often say this with a lot of confidence, giving the impression that they have thought through the argument. Over the last one week, since the presentation of the annual budget of the union government, such  suggestions seem to have made a comeback.

But the confidence of the people making these suggestions largely comes comes from two things. One is that they haven’t had a look at the government data on taxes, which leads them to believe that barely anyone pays income tax and hence, it should be scrapped. Two, they have no idea as to how most governments operate.

Let’s take a look at a few charts to understand why this logic is all wrong. The following chart plots the individual income tax collected by the government as a proportion of the Indian gross domestic product (GDP), a measure of the size of the economy.

Source: Centre for Monitoring Indian Economy.
Revised estimate for 2020-21.
Budget estimate for 2021-22.

As can be seen from the above chart, income tax as a proportion of GDP has only gone up over the years. In 2019-20, it peaked at 2.68% of the GDP. In 2020-21, thanks to the economic contraction due to the spread of the covid pandemic and falling incomes, the income tax to GDP ratio is expected to be at 2.36% of the GDP. It is expected to rise again to 2.52% of the GDP in 2021-22.

The typical argument suggesting that the government should do away with income tax, goes somewhat like this. Oh, but very few people pay income tax. Now that is true, but that hardly means that the government will stop collecting income tax.

A slightly more sophisticated argument (at least the person making it, feels it is a sophisticated argument) goes somewhat like this. Oh, but income tax collected forms just a couple of percentage points of the GDP. That’s nothing.

Honestly, I find both these arguments hilarious. Guys making these arguments have no idea about how the data looks and as I said, which is where their confidence comes from.

Let’s look at the following chart, which basically plots corporation tax (income tax paid by corporates on their profits) and personal income tax as a proportion of gross tax revenue, over the years. Gross tax revenue is basically the sum of different taxes (corporation tax, income tax, union excise duty, customs duty, central goods and services tax etc.), earned by the union government.


Source: Centre for Monitoring Indian Economy.

What does the above chart tell us?

1) The corporation tax collected as a proportion of the total taxes collected by the government, has been falling over the years. In 2009-10, corporate taxes formed around two-fifth of the total taxes collected by the government. In 2021-22, the tax is expected to be at around one-fourth of total taxes. There are multiple reasons for this. Corporate revenue growth has slowed down over the years. Along with that corporate tax rates have also come down.

2) The importance of income tax in the overall taxes earned by the government has gone up in the last decade. In 2009-10, they formed around one fifth of total taxes and in 2021-22, they are expected to form around one fourth of the gross tax revenue earned by the union government. In 2019-20, income tax formed around 23.9% of overall taxes.

Hence, all taxes may appear small as a proportion of the GDP, but that does not mean that they are not important for the government. The government isn’t the entire economy as represented by the GDP but only a part of it and the taxes earned are a part of that part.

Now tell me which government in its right mind is going to drop a tax which is likely to bring in one-fourth of the total taxes earned by it. This especially in an environment where corporation tax collections as a proportion of the GDP have been falling over the years.

Another argument that is made is that income taxes should be eliminated and indirect taxes should be raised. So, with no income tax, people will earn more and hence, spend more, and the government will end up collecting more indirect taxes, and these taxes will more than make up for a loss of income tax.

While this sounds good in theory, the trouble is that unlike the physical sciences, in economics you cannot carry out real life experiments. So, no government is going to risk one-fourth of its revenue just because in theory they could do something else. Nah, not going to happen. The whole argument rests on the idea that if income tax is done away with people are likely to spend more. What if they don’t and decide to save more? There is no way of knowing in advance about how people are going to behave.

Actually, a more refined argument can be made here. People who pay a bulk of India’s income taxes already have most things that they need in life. Hence, their marginal propensity to consume will be low. This means that the extra money they earn thanks to lower taxes, they are more likely to save/invest it than spend it.

Hence, the argument that people are likely to spend more because they will earn more thanks to no income tax, doesn’t really hold. One thing that can be said for sure here is that if income tax is done away with, the stock market will go through the roof (not that it isn’t already).

A better way to increase consumption and hence, indirect tax collections is to reduce goods and services tax on mass produced goods. The impact is going to be much greater in this case.

There are other reasons here as well. There is a huge income tax bureaucracy in place. What happens to those people with no income tax? Income tax is also used by politicians in power to harass those in opposition or other people opposing them. Why let go of such an option?

All in all, income taxes are not going anywhere, even though when the BJP was in the opposition, it was pretty vocal on the issue of doing away with them.

But now they need to run the country and the gross tax revenue collected by the government, has come down over the years. The gross tax revenue as a proportion of the GDP peaked at 12.11% in 2007-08. In 2019-20, it was at 10.61%. It is expected to fall to 9.75% of the GDP this year and rise to 9.95% of the GDP next year, still significantly lower than the all-time peak level.

So, next time you want to go shouting on Twitter asking the government to do away with personal income tax, please do remember these points.

The Perils of Too Much News

In my early teens, there were only two sources of news in India, the daily newspaper and the late evening news on Doordarshan, the only channel in town. Hence, the news wasn’t a 24 by 7 affair like it is now, especially with the advent and the rise of the digital media over the last few years.

The rise of the digital media has ensured that news gets to people faster. One doesn’t have to wait for the morning newspaper or the evening news to know what has happened. Also, with more and more news sources hitting the market, censoring the media isn’t as easy as it was in the past. Hence, to that extent it is a good thing.

Nevertheless, the rise of 24 by 7 news media brings with itself other sets of problems. As Alain de Botton writes in The News—A User’s Manual: “The modern world is teaching us that there are dynamics far more insidious and cynical still than censorship in draining people of political will; these involve confusing, boring and distracting the majority away from politics by presenting events in such disorganized, fractured and intermittent way that a majority of the audience is unable to hold on to the thread of the most important issues for any length of time.”

The point being that proliferation of the media and the rise of the social media has essentially ensured that the audience keeps getting bored and needs more and more new issues to agitate or at least feel agitated about. In the process, the most important issues of the day, actually get lost.

Take the Indian case. One of the most important issues which barely gets discussed in India is the fact that close to one million individuals are entering the workforce every month. This means around 1.2 crore individuals are entering the workforce every year. This is likely to continue at least for the next decade and a half. Further, the number can turn out to be an underestimate if more women enter the workforce.

While, 1.2 crore Indians are entering the workforce every year, there aren’t enough jobs going around for them. Many of these individuals are educated i.e. at least they have gone to school. Nevertheless, they don’t have any employable skills. There are economic and social repercussions that this is going to have.

As Thomas Sowell writes in Wealth, Poverty and Politics: “People who have acquired academic degrees, without acquiring many economically meaningful skills, not only face personal disappointment and disaffection with society, but also have often become negative factors in the economy and even sources of danger… In many poorer countries, especially, the “educated unemployed” are often numerous enough to be not only a major disappointment but a social and political danger.”

Also, what happens is that the only institution ready to employ them is the government. As Sowell writes: “Even many of those with academic credentials, but no economically meaningful skills, who are in fact employed are often employed in government bureaucracies, since they are unlikely to be much in demand in competitive markets where employers are spending their own money, rather than spending the taxpayers’ money.” This is what explains a whole host of engineers, MBAs and PhDs applying for government jobs of sweepers and peons.

The question is, when was the last time you saw anything in the media analysing this issue. We were busy arguing whether a film star couple should have named their son what they did. Until we moved on to something else.

The point, as Botton writes, is that “news organisations broadcast a flow of random-sounding bulletins, in great numbers but with little explanation of context, within an agenda” that keeps changing, and “without giving any sense of the ongoing relevance of an issue that had seemed pressing only a short while before.” This is interspersed with constant antics of film stars.

And this, as Botton writes, “would be quite enough to undermine most people’s capacity to grasp political reality – as well as any resolve they might have summoned to alter it.”

Indeed, this is something that we should worry about.

The column was originally published in the Bangalore Mirror on March 22, 2017

"Companies are Throwing Money at Social Media"

rohit deshpande

Rohit Deshpandé is Sebastian S. Kresge Professor of Marketing at Harvard Business School, where he currently teaches in the Owner/President Management Program and in other executive education offerings. He has also taught global branding, international marketing. In this interview he talks to Forbes India on various aspects of branding.

I came across an interesting an interesting article that you wrote for the Forbestitled Branding Yoga: Good Business or Blasphemy?” Please tell us something about.
I wrote a case study called Branding Yoga. So my comments relate to that project. The first learning objective of the case is to ask the question can anything be branded?. The majority of the students say yes, anything can be branded. But the follow up question is, should everything be branded? And all of a sudden ethical issues and moral issues come up, in debating that question. It is a much more difficult question to answer.
Can you get into a little more detail?
The discussion broadens into this controversy over branding yoga. The particular controversy that got me interested into doing this case is something that I read about in The New York Times. There was a group of Indian Americans who had protested the commercialization of yoga and they said that it amounted to the commercialization of Hinduism. So they drew a parallel between commercialization of yoga and the commercialization of religion.
And how did that they do that?
In order, to make that argument they said that yoga is essentially Hindu and it would not exist if it were not were for Hinduism. This sparked a tremendous controversy that had to do with the history of Hinduism, the history of yoga, which preceded which one, can you teach Yoga without teaching Hinduism or is yoga all about exercise? That is really what fuels the case discussion. So, that is one set of issues that we deal with.
And what is the other set?
The other set of issues that we deal with is that there are two different branding models. One branding model is from Tara Stiles, who is a very successful Yoga teacher in New York. She is American. She is young. She used to be a model and a dancer and did Yoga herself as a way of keeping fit and started teaching her friends. They said there will be other people who will be interested. She made some free YouTube videos on this and they went viral. And then she started a yoga studio. Somewhere along the line, she became the yoga teacher of Deepak Chopra. He took lessons from her. He is a great fan of her brand of yoga and they have a joint venture . They made an iPad app, which has been very successful and even a DVD.
Which is the other model?
The other branding model is from somebody called Bikram Choudhury of Bikram Yoga. Now look at the contrast. Bikram is an American now but he was born in India. He was traditionally schooled and his brand of yoga focusses on the domain called hot yoga. It is extremely regimented and you have to be physically in a great shape to do that. And he has franchises. He has training programmes. He is much more of a yoga teacher training as a way of expanding the franchise, even though both are marketers. She is a much more of a social media type of thing. And both of them are successful. Both have attracted controversy, Bikram probably much more so, despite the fact that he is Indian and more authentic than she is.
What is the point you are trying to make?
Yoga has been very successfully branded, with different branding approaches and what makes it interesting is that in America the majority of yoga teachers don’t make very much money.
They have small studios. They are making a living. But they are not millionaires. Both Stiles and Choudhury have achieved a lot.
The ones who are not making haven’t branded yoga?
They haven’t thought about the branding aspects of yoga at all. I don’t know how it is in India, but this idea of the business of yoga, a lot of people look at it as an oxymoron.
You just talked social media. These days social media marketing is a huge thing. Does it work?
Of course it works. If done well, it works really well. There are a number of case examples of a number of companies that are doing a very good job. But it doesn’t work for everybody. Companies are spending a lot of money on social media. But a lot of it is experimental i.e. they are throwing money at something, and they are really not sure of what works and what does not work. We are at a nascent experimental stage where we are trying to figure this out.
Can you elaborate on that?
There are lots of examples of social media where the companies themselves are not sure whether the money is worth the spent. I am not sure I can isolate a social media disaster as much as companies not knowing whether they spent their money well. I would say 90% of the companies are in that group of not knowing whether they spent the money well.
Can you explain through an example?
It has to do with the appropriate success metric. How do you judge whether your social media campaign work has worked? One of the most popular metrics is the number of likes that you get. I have some colleagues who have done some research on this and they have found that likes do not translate into sales. When you think about it cognitively it doesn’t take a lot of effort to like but it takes a lot of effort, and not to mention money, to buy. Hence, click-throughs and getting sales, that is much much harder to measure.
So what is being done about this?
The companies are trying to figure out whether by spending more money they can get click-through , that is, translate likes into sales. But there are all kinds of other factors that might explain sales and how do you isolate it and so on.
Can you give us an example of a company which has used social media well?
I am developing a case on Dell. And they are considered to be a best practice example of using social media in the business to business space. What works for them is that they have a business model which is direct to consumer rather than going through retail. So they have open channel historically with their customers. They don’t get information on their customers from some sales partners, which means that when something goes wrong, they also find out very very quickly. And they have traditionally done that through their telephone lines. People call on their toll free lines when they have a problem. With the advent of social media, some irritated customers started blogging that they were upset at Dell, there is a problem that happened and so on.
And what did Dell do about it?
Michael Dell, who is the founder, is himself very active in the blog space and when he discovered this he told a team of his people that we should just reach out directly to these customers and fix these issues. When they reached out to fix these issues, the bloggers put blogs saying that here is what the company has done. Effectively, their bloggers were doing their job for them. As you know there is a lot of research that shows that restitution actually gets you a lot more business and than actually the initial sale does. And when the restitution story is being told by a customer it carries even more credibility. That is the story of how Dell got into this space. Now they have a command centre and they keep monitoring what is going on. It has to do with the complaint hotline or the repair hotline or whatever you call it, which is the history of the company. They have now translated this into the social media. They estimate that it has saved them a lot of money and a lot of loss, because of people who would have complained and gone away and scared other people from buying Dell.
Given your experience in the field of marketing and branding, which is the most frequent branding mistake that companies make?
The most frequent branding mistake is to assume that your brand is a logo rather than the personality of your product and company. To assume that its a simply a trademark and therefore it should be managed out of your communications department and maybe your legal department, rather than becoming a part of the overall strategy of the firm. In the research I have done this tends to be particularly true for technology intensive companies where the product is everything and the quality is everything. It is almost like a Dilbert cartoon which stereotypes marketing and says that marketing does not add any value and therefore branding is not very essential and it is all about the quality of the product. Companies in emerging markets are not comfortable with thinking about a brand as anything more than what their marketing people do. It is not seen as a part of the strategy of the firm. A brand is not seen as a relationship with a customer, it is seen as a trademark.
Can you give us an example which doesn’t hold true for whatever you have just said?
I wrote a case on Infosys and they have done an incredible job of making the Infosys brand mean something. Narayana Murthy in some ways represented the brand. The confidence that people had in buying from Infosys came from people who ran the company. The brand stood for more than just IT. The brand stood for the people and since 90% their sales comes from outside India, they actually had to brand India before they could brand Infosys. So there is a whole big story there of how India Inc came to be and what role Infosys played in it.
When brands become successful, the tendency is to extend it. Do line extensions work?
Line extensions do work but they don’t work in all cases. The Kingfisher story is an example of a line extension strategy that did not really work. Yamaha is an example of a line extension strategy that has worked very well. But I think the question is why the line extension? If the reason for the line extension is that you have built a powerful brand and want to milk it, then there is a chance that it won’t work. But if the purpose of the line extension is that it is something that the consumers want, then there is much more likelihood that it will work.
Any other point that should be kept in mind?
Another key part is that what does the brand mean? And does that meaning extend? The question for the Kingfisher management should have been what does the Kingfisher brand mean and how does that meaning translate from beer to airline? There are some brands that transcend the product category, in which case the brand might go across a whole variety of things. There are other brands where their meaning is very rooted in the product category, which is almost like the paradox of success. The brand is successful because people see it as Kingfisher means beer and it can’t mean anything else.
Do celebrity endorsements work?
The research on that is in this area called brand personality. Where the personality of the celebrity is consistent with the personality of the brand, it works. When there is a mismatch, then consumers are cynical and they believe that the only reason this person is speaking is because she or he is being paid for it, and they probably don’t use the brand themselves. I think that is the real issue.
Can you give us an example?
The bad example is the [James] Bond franchise. The BMW introduced a product called z3 through a Bond movie. It was for them a relatively inexpensive convertible car. This made a lot of news because James Bond was a British secret agent who used to drive a British Aston Martin and was now driving a German car. This made for good media. This was a very successful product placement. When that happened, not only BMW but a whole bunch of product companies decided that they would flood the next Bond film with product placements. There was a huge consumer backlash. Consumers were frustrated to the point that it was hurting the Bond movie franchise. People were saying that there is no way that the endorser is personally committed to all these different things but he is using it because he is being paid.
And a good example?
There are several examples of where the brand personality fits. An example of that is the basketball player Michael Jackson advertising Gatorade, which is a sports drink. And it went on for a very very long time.

The interview originally appeared in the Forbes India magazine dated July 10, 2014