February 8, 2015 ☼ Economy ☼ fiscal policy ☼ mahatma grade problem ☼ Narendra Modi ☼ Provocations ☼ public finance ☼ Public Policy ☼ social reform ☼ telecommunications
This is an archived blog post from The Acorn.
Prime Minister Narendra Modi’s initiative to clean up the country showed that he was prepared to tackle the most difficult problems India faces—cleanliness, hygiene and sanitation are Mahatma Grade Problems, caused by a simultaneous combination of individual, social, market and government failures. The Swachch Bharat initiative has come about because he used both his popularity and power to try and change mindsets and attitudes. To succeed, it needs the government, business and social leaders to change peoples’ minds and moral incentives. If it becomes yet another government programme, it is bound to fail.
So the Modi government’s proposal to impose a cess on telecom services to finance the Swachch Bharat campaign should cause us disappointment and alarm. It is the wrong approach to the problem, using the wrong method. Here’s why.
Levying a cess dilutes the moral incentive that a borderline conscientious citizen faces. Instead of a gnawing feeling when she sees garbage in public places, the marginal citizen is likely to feel the same-old, “I’ve done my part but the government is not doing its job properly”. There is evidence that compliances rates (for tax payments and other rules) goes up when citizens see the government delivering honestly and effectively. Similarly, the perception that government is inefficient and corrupt reduces compliance. In other words, levying a cess on citizens is not only likely to cause them to outsource their guilt and responsibility, but also try and avoid having to pay the cess. Swachch Bharat should be about emphasising that hygiene and sanitation are about personal honour and dignity, not about pay-tax-and-forget.
That’s not all. A cess is a bad way to raise revenues. A cess on an unrelated activity is a terrible way to implement a bad way to raise revenues. As this blog commented on the previous government’s use of a cess on restaurant bills to finance education, there is no better way to signal that a government has confused public finance priorities than a cess. If a programme is important, it should be financed through the core budgetary revenues. Clearly, one of the prime minister’s most important priorities ought to be enough of a priority to be funded through the conventional budget.
If at all a cess has to levied, it should be on non-essential spending. Furthermore, a specific tax on an unrelated economic activity merely to raise revenues is a very bad idea. Telecommunication services are already subject to heavy price regulation, leading to very bad quality of services across the board. An additional tax on these services will burden consumers, impact telecom service provider revenues (and hence the license fees they pay the government) while doing nothing to improve service quality. Telecommunications services appear to have been chosen for the cess mainly because it is easy to collect from them, and people will have to make calls and access the internet anyway.
Why could the tax not have been levied on entities and industries that dirty public spaces? At least that would have attempted to recover the cost of the negative externalities.
But here’s an even better idea to implement Swachch Bharat: give a Swachch Bharat tax break to all income tax payers. When filing their taxes, let taxpayers tick a box saying “I have done my best to make India clean”. Of course, a lot of people will claim the tax exemption without changing their behaviour, but a some will. It is better to trust the citizens more to do the right thing, than to tax them more on the premise that they will do the wrong thing. That’s the only way Swachch Bharat can work–when the relationship between the citizen and the country changes into one of mutual trust and mutual concern. The campaign is about capturing hearts and minds, not more rupees.
The Modi government would do well to resist the temptation to use age-old sarkari methods to solve a nagging social problem.
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