Thursday, December 4, 2008

The Economics of protecting common taxpayers

India's 9/11 came to Mumbai on Nov 26th and resulted in the deaths of over 180 people including about 150 indian citizens.

Public anger boiled over the fact that:
1) No politician came forward to the spot to assist the citizens
2) All politicians were interested in self-preservation and increasing their own security by depriving protection meant for the common taxpayers.

The Indian Finance Minister, Palaniappan Chidambaram is now in charge of the Home Affairs Ministry after the previous one was forcibly booted out fo refusing to take responsibility for this attack.

Mr.Chidambaram has been an astonishing finance minister india had so far. He has single-handedly concentrated on increasing the income of the state even at the cost of increasing inflation. His drastic policies in collecting taxes and surcharges has surpassed every minister so far to the point where real incomes of the salaried class fell by 14% last year.
In addition he has been 100% tight-fisted in expenditure by any reduction of taxes or prices.
For instance the recent fall in Petroleum prices by more than 55% did not result in reduction of petrol prices in India. Because a reduction in prices will mean a reduction in the excise duty collection on the face value of the administered prices.
His policy may have resulted in giving the Government a huge increase in income thus enabling it to spend more on "absolutely necessary" programs like more roads to nowhere or repainting the parliment house or buying 100 armoured mercedes cars for politicians.

As Finance Minister, Mr.Chidambaram knows that he spends over Rs.1800 millions in protecting about 250 politicians who are considered "vital" to the country. This includes some colorful characters and not so colorful ones whose continued existence is somehow justified by the government as necessary to the continued existence of the Indian Union.
Mr.Chidambaram also knows that the income and wealth taxes paid by these 250 VIP politicians amount to a total of Rs.670 million in 2007.So the net outflow from the government is Rs.1130 million which is an expense as far as the FM is concerned.

Now let us see in cold calculation whether it makes sense to protect the salaried, common, non-VIP tax payers with that money or does it pay to continue to protect these politicians.

Out of the 180 poor dead souls, 150 were indian tax payers. Some were rich (like the CEO), some better and some salaried class who pay little or no taxes.
Now let us see how much they contribute to the FM's kitty:India has some of the highest tax rates in the world at 33.5% average tax.
The mean average salaried tax payer pays Rs.19521 a year as income tax.(Salaried tax payers stand at 31.5 million while income tax collection stood at Rs.614930 million last year).
Now, 150 dead people x Rs.19521 (average) comes to Rs.2,928,150 a year in total income tax collection.

Since the government failed to protect these 130 tax payers lives, The FM stands to lose Rs.2.537 million a year in tax from these dead people.
Considering their average age was about 33, and their retirement age being 60 in india, they still have 27 years to pay taxes.
Which means 150 people x Rs.19521 x 27 years = Rs.79,060,050 in total over a period of their tax paying lifetime at current salaries.
But of course salaries increase every year. In india it increased at an average of 13.7% according to economic times.
Which means their tax payouts increase also increase by same amount.

Now, if we consider the average increase in tax payouts every year we go from Rs.19521 per year per dead soul in 2008 to Rs.483,630.50 in 2032 (The year he/she would have retired). Over the period of 27 years, he/she would end up paying Rs.580,693,658.37 as taxes in total. (Rs.580.7 Million)

Now, we saw earlier that protecting VIP politicians costs the FM Rs.1130 Million PER year and this increases by the increase in salary percentage of 13.7% (Guards are salaried).
So again the total cost to the FM is Rs.31,237,720,089.93 (Rs.31 Billion).

Tell me, Mr.Finance Minister, which is more preferable? Earning Rs.580.7 Million over 27 years or losing Rs.31 Billion over 27 years

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