GST Council meet: The Goose Point Theorem for rate rationalisation

The real issue before taxation lies in identifying the Goose Point and the way goes through 'neutral goods'

So, the GST Council meeting, held at the end of five years after its introduction, has concluded with a promise of rate rationalisation. That’s good. Far too many things were not being taxed at all.

That said, and quibbles and teething troubles notwithstanding, the GST in India has been very successful if you measure success as a sustained increase in government revenues. That, in the end, is the only purpose of all tax reform anyway.

There is, of course, a great deal of hypocrisy and nonsense when tax reform is discussed. But as Jean Baptiste Colbert, the finance minister of Louis XIV, famously said, the real test lies in plucking the goose to the point when it is just about to start hissing.

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I have formalised this very practical idea by giving it a new name: the Goose Point Theorem.

To get to this Goose Point, politicians and economists have come up with two new concepts intended to act as an anaesthetic to the goose when it is plucked. 

One is the political idea of ‘fair’ tax as embodied in the American Fair Tax Act. The other is the hypocritical idea of revenue neutrality. To the extent that all taxation is unfair but necessary, the debate has been focused on the rates, of which incidence is a political subset.

In the US, a considerable amount of research says this ‘fair’ rate is 22-28 per cent.

In India, however, we have opted for the neutral rate so that the government can say, “look, I am only rearranging the taxes, not increasing my revenue”. All this is designed to befuddle and confuse the citizens by claims of justice — fair tax — and selflessness — revenue neutrality.

I think the idea of fairness in taxation is a non-starter. All taxation is legally sanctioned banditry. It must not obscure its coercive aspect. The idea of revenue neutrality has merit because it doesn’t hide behind a veil of morality. Instead, the government says, “I will tax in ways that make no difference to my revenue. Nice try.

The real issue before taxation, at least in my view, lies in identifying the Goose Point. But to make this identification, a different sort of economics, untainted by individual notions of fairness of economists and politicians, is needed.

Fortunately, there is a way of getting to the Goose Point — or at least as close to it as makes no difference. For this, we need the concept of what economics calls "neutral goods".

These goods have to be consumed regardless of everything except when a gun is held to the consumer’s head or are those goods that don’t alter their preferences. Air and water are good examples of the first but insulin for a person with diabetes is an even better example for taxation. As for the latter, police services in India are a good example.

The key to understanding this is the notion of indifference in consumption. The consumer simply doesn’t care because an increase or decrease in consumption does not (usually) make any difference to their utility.

So, after this long and roundabout preamble, let me get to the point. As the finance ministry starts its exercises in rate rationalisation, let indifference to consumption levels be one of the guiding principles. It will be surprised at the results because it may well find that certain things, like single malts from Scotland — or casinos in Goa — can be taxed at one hundred per cent.

If the geese howl, the sellers can reduce their prices, or those addicted to these things can reduce their consumption.