Friday, July 14, 2006

Why Indian farmers do not pay taxes

I have often wondered why farming income is exempt from income tax in India. It is one of the holy cows of Indian politics - any finance minister daring to even mention "income tax" and "farming" in the same sentence will be denounced by his colleagues, cutting across party lines, as "anti-poor" and "anti-farmer".

By the same token, are all governments "anti-salaried class" since these people pay tax? Or is a farmer with an income of Rs. 5 lakh "poor", or at least "poorer" than an executive earning the same amount? Is not the latter poorer than the former, because he pays out a portion of his income as tax while the former retains all of it? Is farming income somehow holier than income from other professions because farmers "feed the nation"? By that logic why should doctors be taxed? Or teachers? Are their occupations not equally important? (One can at least import food, importing healthcare or education is tougher)

The answer, of course, lies in the power of the small, concentrated minority against the wider, diffused majority. Exemption from income tax benefits a small group of rich farmers (poor farmers of course do not earn enough anyway to benefit from these concessions). These people have a strong incentive to support their local politicians in various ways to maintain the status quo. The local politician has a strong incentive to keep his support group happy. On the other hand the wider majority who would benefit from having their tax burden shared do not have enough of an incentive to lobby for this, simply because the additional benefit accruing to any single person is small. As a result, the tax-exempt farmer is much better off. Each taxpayer is slightly worse off - but not enough to raise a fuss about it.

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