While everything else on the front of controlling the outfall of COVID-19 is going well in India, this labour exodus kind of aberration could have been effectively avoided had a comprehensive database and a microsimulation model for dealing with the present situation were already in place. If a system of refundable credits were in place, the benefit would have been transferred instantly to their accounts alleviating further anxiety and pain
-Dr Anil Gupta
The Government of India is facing the challenges posed by COVID-19 boldly. It has brought in policies to mitigate the impact of this challenge both on the health and the economic front for the population, especially the most vulnerable of all the poor, the disabled and the seniors. That's why it is being recognised and appreciated the world over. The direct cash (and in-kind) benefit to the population is the response of the time. Observing from 10,000 miles in Canada, I could see the unequivocal support for the government and how unified and determined the population is in its fight against the Pandemic.
The need for building analytical capacity for India, including a microsimulation model for budgetary analysis, revenue forecasting, distributional analysis and design of a refundable credit among other uses is already overdue. In layman’s term (taken from my lectures at Harvard and Duke):
A microsimulation model is a computer model which operates at the level of the individual unit; the level at which policies operate, such as a person, a family, a firm, or a property. These models simulate large representative populations of these entities to draw conclusions that apply to higher levels of aggregation”.
AN AVOIDABLE EXODUS
One of the reasons for the recent exodus of people from some states of India to their home state is the absence of cooperation from landlords and employers of daily wage earners. It is irony that despite the declaration of an extensive aid package for Corona virus to help and offset impact on daily wage earners, there has been mass exodus of such workers among states because they could not get the benefit in hand to meet their anxiety and needs. In the US too, there was an exodus of individual to other states, even to small states like Rhodes Island creating favourable conditions for the spread of the community-based virus.
While everything else on the front of controlling the outfall of COVID-19 is going well in India, this labour exodus kind of aberration could have been effectively avoided had a comprehensive database and a microsimulation model for dealing with the present situation were already in place. If a system of refundable credits were in place, the benefit would have been transferred instantly to their accounts alleviating further anxiety and pain.
PREDICTABLE AND EVIDENCE-BASED TAX POLICY
India needs to develop such a modelling capacity. When partnered with academics/private research foundations, it will help in the flowering of a true evidence-based policy environment and a venue for young researchers to blossom through practical training while pursuing their graduate programs in economics and other disciplines. It will usher in a new era of evidence-based citizen-centric public policy in India. It’s high time India awakes to the dire need of such an analytic capacity if India dreams of being part of the leading league of nations.
Further, the government must understand that once people get used to such a credit (pseudo-Guaranteed Income Supplement), they will demand the continuation of the same until condition truly improves which may be months and years away. Therefore, it’s imperative that the government well prepares itself with a robust system with all its impact fully understood, including the revenue cost and its direct impact on the economy.
Such investments are essential to India becoming an advanced economy moving in the direction of the league of nations with a good safety network for its most vulnerable population. This capacity and tools are critical as the government endeavours to implement direct benefit program of this magnitude to ensure both the revenue implications and their distributional impacts.
MODINOMICS IS REASSURING
Luckily the fiscal policies and vision of the Modi Government in India to establish an economy based on self-driven fiscal ease, discipline and efficiency already exist for going ahead towards undertaking development of a microsimulation model that is a necessary tool to achieve this goal.
I find some recent indications from the top leadership as further proof of their seriousness about achieving this goal. For example, in her budget speech, Finance Minister Nirmala Sitharaman announced the introduction of Aadhaar based verification of taxpayers. She also spoke about launching a new system for instant online allotment of PAN to individuals, without filing an application form.
Similarly, in his address at the Times-Now Summit 2020 PM Modi reiterated his commitment towards making the tax system citizen-centric; adopting a taxpayers' charter; doing away with tax harassment and; expressing concern over only a microscopic footprint of the tax net. All this shows that India is ripe for developing and adopting the Microsimulation model to bring in the necessary fiscal discipline and a self-assured tax and expenditure system.
A MICROSIMULATION MODEL - THE NEED OF HOUR
The creation of a solid and robust analytical capacity, coupled with a comprehensive base of information will be the key to realise what the PM has articulated above. Such a model would permit a robust estimation of the tax gap under all the taxes viz. Individual, Corporate as well the GST. Also, it will ensure that future governments would not tinker with it to make it susceptible to corruption.
An individual/family-based Microsimulation model is capable of estimating taxes and revenue and distributional impacts of tax policies correctly. Such a model when fully developed along with the underlying comprehensive database would allow the policymakers to design and analyse a wide spectrum of public policy probabilities from tax policy to housing to agriculture and emergency relief efforts.
A NATIONAL DATABASE
India today needs a comprehensive database with socio-economic and demographic information representative of the Indian population both at an individual and family level. Augmented by household expenditure information eventually supplemented health status information.
In a developed and more importantly, for a developing economy like India, the underlying database should be representative of the whole population. That’s why it’s important to use the survey data augmented/enhanced by the admin data along with required distributions from program data.
For the implementation of such a refundable tax credit, the Minimum-Data-Set (MDS) is essential as basic information to make the system workable. In the case of India, most of this information should be already available through the existing Citizen-Centric policies in place such as Aadhaar and PAN. This includes: Name; Address; Age; Marital Status; Number of Children and their Ages; Family Income from Last Year (this could be 0) and; Bank Information (for Direct Deposit).
In those cases where such information is missing at present, those individuals should be encouraged to open a bank account and file a Zero-income tax return to be eligible for future direct deposit benefits. Like the FM has simplified process to receive PAN, an email from Citizen’s verified account with self-verified personal information should be acceptable to the Bank for further verification at an appropriate time, in the future, if necessary.
A RESPONSIVE SYSTEM
The system must be responsive to the changing needs and circumstances of individuals and each Indian family that needs financial benefits from the government.
Such a benefit will be based on their last year income (moving forward from tax records) with a provision to submit the change in income for unforeseen circumstances.
It is, therefore, also imperative for such a system to provide for provisions for individuals/family to deselect themselves from the program if they do not wish to receive such a benefit. This is probable, especially in India, as an otherwise affluent individual/family may qualify based on the income criteria alone. It’s observed in the West that takes up rate of such schemes is generally low. This is also evident from the enormous response in the past to the request from the Prime Minister on giving up government subsidies like in the case of cooking gas cylinder and railway concession for senior citizens. I estimate the take-up rate could be as low as 70%.
At the Times-Now Summit 2020 PM Modi reiterated his commitment towards making the tax system citizen-centric; adopting a taxpayers' charter; doing away with tax harassment and; expressing concern over only a microscopic
footprint of the tax net. All this shows that India is ripe for developing and adopting the Microsimulation model to bring in the necessary fiscal discipline and a self-assured tax and expenditure system
A REFUNDABLE CREDIT
I had developed models for the first-ever refundable tax credit to offset the adverse effect of the introduction of GST (a regressive tax) in Canada in 1991. Such a credit would be equally applicable for a direct benefit to mitigate the impact of natural disaster as an enhanced GST credit. Also, part could be a non-refundable component for those who are temporarily affected and could potentially withstand the impact to some extent but not a catastrophic expense one like increased health care expenditure (the most happening for the end of life care as is also evident in the present COVID-19 case).
This new credit amounts to a pseudo guaranteed income support program, albeit for a limited duration. India can ill afford it in the long run. However, this benefit could provide a foundation for such a support programme which is needed for a country like India. I would be willing to provide a framework for such a program if the government becomes serious in using this opportunity for a long-term solution to fight the menace of poverty leading to a denial of fundamental amenities of life in no small part of the population. Such a credit would have further dividends –increased social cohesion increased productivity and basic dignity for the poor.
EXPLODING POPULATION: A SERIOUS ISSUE
The dangers of ever exploding population has become abundantly clear and no country, let alone a developing country, could ever muster limited resources to meet the demands and the challenges posed by its enormity. It’s high time that India bring in a robust policy to arrest the growth of population, limiting it to a family size of 4 as I have used below in my example of a refundable tax credit.
A refundable tax credit developed using the model could be applied in diverse situations to mitigate the unintended adverse impact of various policies.
- Need to define who is adversely affected and by how much. On a regular basis, e.g. for a family of 4 with 2 children, identify the marginal impact of the given policy or circumstance.
- Offer a time-bound income-tested refundable tax credit (nominally equivalent to the marginal impact) through the tax system.
- Design Income tested transfer programs (e.g. welfare, health, GST credit, rail subsidy) optimally to ensure that such programmes are relevant, responsive, and responsible. The amount could be an-hoc number based on the need of the hour and the fiscal capacity of the government. It’s important to note that such direct transfers are visible and positively impact the individuals.
- Everyone would file a tax return to claim the refund – which would help to expand the tax rolls. Going by past experience of successive increase in the number of citizens jumping up the socio-economic ladder over past seven decades, it is not a wishful expectation that the number of tax payers would gradually increase as tax filers, who may not pay any taxes now but file to claim tax credits, will someday cross over to the taxpayers' side. This is critical to tax policy planning in an advanced economy.
- In addition, people tend to spend such transfers promptly and thereby pumping the money back into the economy resulting in increased taxes through the GST, for example.
(The writer is a Canadian national of Indian origin, is an internationally reputed expert in the field of developing MICROSIMULATION MODELS and COMPREHENSIVE DATABASES for governments. He has successfully created, employed, and promoted MICROSIMULATION models for Personal Income Taxes and GST for Canada and help build analytical capacity in many developing countries in the area of taxation and health policy. He helped develop and taught a course on Tax Policy and Revenue Forecasting at Harvard and worked with leading international organizations like Harvard and the Worldbank.)