From UPSC perspective, the following things are important :
Mains level: Impact of tax cut on the economy;
Why in the News?
Before the pandemic, the U.S. and India reduced corporate taxes to boost growth but we now we can evaluate their effects.
Case Study on the Effects of Tax Cuts in the U.S.The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, significantly reduced the corporate tax rate from 35% to 21%. A recent analysis by economists Gabriel Chodorow-Reich, Owen Zidar, and Eric Zwick highlights several key findings:
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Tax Cuts in India
In September 2019, India also implemented corporate tax cuts, reducing the rate for existing companies from 30% to 22% and for new companies from 25% to 15%. The primary reason for this move was to stimulate economic growth and attract investment, particularly in the manufacturing sector.
Impact of the Tax cuts:
- Revenue Loss: The tax cuts resulted in a revenue loss of approximately ₹1 lakh crore in 2020-21.
- Gig workers (insecure forms of work): Although unemployment has decreased since the pandemic, much of the new employment is in insecure forms of work.
- Decline in Regular Employment: According to the Periodic Labour Force Survey (PLFS) in India, the share of regular wage employment fell from 22.8% in 2017-18 to 20.9% in 2022-23.
- Tax Burden Shift: There has been a notable shift in the tax burden from corporate taxes to individual income taxes. The share of corporate taxes in gross tax revenues fell from about 32% in 2017-18 to 26.5% in 2024-25.
What must be the next step? ( Way forward)
- Focus on Future Investment: Policymakers should consider implementing high taxes on existing profits while providing incentives for future investments to stimulate economic activity.
- Addressing Income Inequality: Tax policies should be designed to ensure that the benefits of tax cuts do not disproportionately favour wealthier individuals or corporations at the expense of wage earners.
- Evaluating Economic Conditions: Need to evaluate the tax cuts to ensure they are not merely providing short-term benefits without addressing long-term growth and fiscal stability.
Mains PYQ:
Q Enumerate the indirect taxes which have been subsumed in the Goods and Services Tax (GST) in India. Also, comment on the revenue implications of the GST introduced in India since July 2017. (UPSC IAS/2019)
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