Who pays our income tax ?

One of the longest ongoing discussions I see in social media ( mainly LinkedIn and Twitter ) all the time, is about how we Indians are paying too much tax and how the government isn't doing anything, and comparing India with the "heaven on earth, the holy land" that is Arab countries, where there is no Income tax. Something makes me wonder about that sort of argument every time. Are people who earn a lot, really "contributing"/"helping" the economy that much, or is something else going on ?

 Income tax never made any sense to me when I was small. I understood that government taxed stuff like Cinema, food items, cigarettes as they are commodities. But why would a government want to tax an individual's earnings ? I see many economically inclined people say that Income tax is not a good thing, even economically speaking and indirect tax all the way is the way to go. I never understood their reasoning too. 

Recently though, I have started to gain some understanding in why income tax made some sense. Through some arguments with my friends/ YouTube videos / Books etc., I have developed a rather different opinion on this subject.

So let me start at the top with the basics. Why cant non-monopolistic companies arbitrarily decide to hike up their prices of their goods are rake in profits ? High school economics has taught us that in a market economy, competition tends to bring the prices of goods to an equilibrium. Why does it do that ? The market players are motivated by their profits, but the consumers are motivated by low prices, so eventually if someone charges too much for a product, people will move to the others. Easy thing.

Yearly during the budget season, we all see entire newspapers dedicated to how prices of goods are going to be affected by the budget. Is it due to the companies sentiments on how confident they are on the government helping the people, like what happens in the share market ? No. Most of those changes are easily due to the increase/decrease in tariffs, taxes, levies, duties and whatever. So if the government decides to increase duties on goods, we brilliantly understand that companies are not going to bear it, and we conclude that the prices of goods are going to increase to compensate for that. Why ? All these taxes/charges apply to all the players in the market. So suddenly the profits these goods were making are going to change. And in a rational economy, all players in it know that all the other players know this. Since everyone is losing "equally", a new equilibrium will be formed which will be above or below the existing one, depending on the direction the tax moves. Simple. We now understand that if taxes change, the price of goods change to compensate for it, at least eventually.

Companies earn profit by selling goods/services or in case of some companies, making fools of normal people. But what is the cost of this ? One of the major ones is labour. But in that case, the company becomes the buyer, and the common man becomes the seller.. Aha ! How the turntables !! 

Sadly, as much as we would like to think that we are much noble compared to a heartless organization, when it comes to economics, we tend to behave similarly. So imagine if suddenly the Indian government, under whoever rule you prefer, decides to decrease the income tax. What an amazing decision! Everyone is going to get some extra money due to the reduced tax burden. Right ? Right ?

Basic economics might say No ! Income tax applies to almost everyone in the country, who earns an income, and if it is reduced universally, It is going to affect everyone. Just like how we know that a tax reduction, will be followed by a price reduction, the companies must also be eagerly waiting for a reduction in their wage expenses. And since even labour is a competitive market ( excluding unionized industries ) , this will eventually happen. Ofcourse, economy is not that simple. But a change in tax, will definitely affect the price and the direction of the price move. If the income tax is reduced, more people will be willing to take in low paying jobs, because of the reduction in burden -> More supply ( for the lower paying job ) -> Reduction in prices. Classic economics. 

So, if the prices gets affected by the tax, and will increase or decrease based on the it, who really pays the tax ? The buyer or the seller ? It must be understandable by now that

            Selling price = Cost Price + Profit + Tax

And when tax moves up, Selling price moves up, and the profit remains the same. So the seller really doesnt pay anything, the profit the seller is getting is still the same. But it is the buyer who is paying the extra bucks to buy the same thing.

In the income tax sense though, the company is the buyer. So it is only logical that the tax burden is on the company hiring us. Maybe that's the reason, why heartless companies like to see our pay as a "Cost to Company (CTC)". A similar phenomenon, is the reason why people get paid very differently based on where the person lives. All we puny humans care about is how much we can buy with that job. Not how much is the dollar amount that we "technically" get.

So, that means that the salaried person isn't even paying the income tax. It is the entity that consumes that resource that ends up paying. In that case, why are we rioting in social media shouting around about "contributing" to the country, and not getting anything back, when we technically aren't even paying ? The person who should be actually proud in this case is the "courageous" person who imports a PS5 from US, because scalpers have made it cheaper to import something than buy something locally. This champion has contributed a whopping 30% on the cost of the PS5 to the country.

Next time, when you see a bad road or a pothole, instead of coming onto Linkedin, and posting the same old shit, consider importing a Rolls Royce ( and pay the import duty, unlike a certain someone ). You can proudly call yourself a warrior of the Indian economy.

End Note : I am still exploring this topic, and If you feel that in some way I am failing to see an angle in this argument where I am absolutely wrong. I am very open to a discussion. Comment here or just ping me in whatsapp if you are too embarrassed to associate yourself with this blog. I actually love arguments like this.