#158 Avoiding The Usual Distractions

India Policy Watch #1: On Hijab And Freedom

Insights on burning policy issues in India

— RSJ

The hijab row roiling colleges in the Udupi district of Karnataka reached the courts this week. A full bench of the Karnataka High Court ruled on Thursday that all students are restrained from wearing clothes with religious symbolism within classrooms in institutions that have a prescribed dress code or uniform. The bench adjourned the hearing to Monday while requesting the state government to reopen the educational institutions. The government meanwhile declared holidays till Feb 16 to avoid the burden of opening up the colleges in the interim. 

The order has some interesting passages including this:

“It hardly needs to be mentioned that ours is a country of plural cultures, religions, and languages. Being a secular State, it does not identify itself with any religion as its own. Every citizen has the right to profess and practice any faith of choice is true. However, such a right not being absolute is susceptible to reasonable restrictions as provided by the Constitution of India. Whether wearing of hijab in the classroom is part of the essential religious practice of Islam in the light of constitutional guarantees, needs a deeper examination.”

This is an old conflict from the time of enlightenment when reason, empiricism and individual liberty were placed on the pedestal by the leading thinkers of the time. Industrialisation, the weakening of traditional social structures because of population shifts to urban centres, and the loosening of the grip of religion in everyday lives meant the questions about the place of religion in civil society and the relation between church and state animated the political and social discourse. Over time though doubts emerged about the benefits of such progressivism. The anxiety over losing a sense of community, the guilt of turning away from one’s religion and a kind of longing for a past that was precious but now lost sowed the roots of cultural conservatism as we know it today. 

In less diverse societies than India, this battle is framed as that between individual freedom and choice versus the inner order and stability that a society draws from its legacy and culture collectively. This itself has been fraught as we have seen in the backlash against liberalism over the last decade. Things get more complicated in India. There’s the individual freedom to choose and the society that has to contend with that freedom and its impact on it way of life. And then there’s also the community, often in minority, to which the individual belongs which might privilege its desire to conserve its values over both the individual and the society.

This is a three-way problem. Should we see the girls wanting to wear hijab in educational institutions as exercising their freedom? Before we even get to whether this freedom has to be circumscribed in certain scenarios like the High Court has opined, should we ask whether we are convinced this choice of hijab is an individual choice? Some of you may ask does that matter. The girl students are themselves saying it is what they want to wear. Who are we to object? But is that choice so obviously individual? Or, is it the choice of another collective, the religious community, that’s imposing it covertly through its own code that’s coercive? Then, in the name of supporting the individual choice of wearing hijab, are we subjugating the choices of many other girls in future who might be coerced into wearing hijab were this battle won by these girls? Is the individual freedom a moral absolute in all circumstances? Or, does this kind of freedom that might mean absence of choice for other girls in choosing not to wear hijab in future that liberals should get behind in force?  

Our founders in their debates at the constituent assembly contended with these three forces - the primacy of the individual on the back of which the liberal constitution was being written, the communal identity of people that gave their lives meaning and structure over centuries and couldn’t be wished away, and the need for a centripetal force of legal and social system that drew the society closer together. Some kind of a balance was attempted and written into the constitution as fundamental rights. But a lot was left to the leaders and the people to find for themselves through practice, customs and traditions which would differ across regions and communities. It was acknowledged that people will have to be trusted to follow what’s acceptable and what has to be changed in their social realms without imposing a strict rule of law over it. This is why it is futile to argue over cultural issues through the lens of liberty enshrined in the constitution. There are enough exceptions all around us for every stripe of argument to be made for and against it. This is what we see in the hijab row. There are arguments about the individual choice of young Muslim girls and their rights over their bodies. There is a case made about how religious symbols of Sikhs are allowed within educational institutions or how easily we accept the Hindu festivals of Ganesh Puja or Saraswati Puja. And there’s the point made about keeping educational institutions free from overt religious symbolism else we set off on a slippery slope. There’s no easy or right answer.

The only answer to this is by asking what was the custom in these schools and colleges before the row started. And to revert to the status quo. Because things only get worse when trying to ‘solve’ such issues. Of course, any attempt to solve this must also be seen in conjunction with the politics that’s dominant in society now. It is difficult to argue on the principle of keeping religious symbolism away from the matters of the state when you have an almost daily spectacle of political leaders flaunting visible religious symbols of the majority denomination deliberately. That’s again a deviation from the status quo that threatens a fragile equilibrium we have maintained since independence. But maybe that’s the intent all along. To keep stirring the pot of communal disharmony to distract us. It isn’t so much about shaking things up and awakening the spirit that brings us together. That’s the ruse used to explain our relative underperformance. In essence, this is that old colonial game to use culture and religion to divide us in a new garb.    

In his famous essay, Culture and Anarchy (1869), cultural conservative, Matthew Arnold, made two key points about culture that I thought will be useful to bring here. It clarifies why culture is important to claim for social order and what kind of customs take us further in that pursuit of harmony and inner stability. It is a useful test to apply when we claim cultural practices as a manifestation of freedom of choice. Arnold writes:

“The whole scope of the essay is to recommend culture as the great help out of our present difficulties; culture being a pursuit of our total perfection by means of getting to know, on all the matters which most concern us, the best which has been thought and said in the world; and through this knowledge, turning a stream of fresh and free thought upon our stock notions and habits, which we now follow staunchly but mechanically, vainly imagining that there is a virtue in following them staunchly which makes up for the mischief of following them mechanically. This, and this alone, is the scope of the following essay. And the culture we recommend is, above all, an inward operation.”

Further, he writes:

“Thus, in our eyes, the very framework and exterior order of the State, whoever may administer the State, is sacred; and culture is the most resolute enemy of anarchy, because of the great hopes and designs for the State which culture teaches us to nourish. But as, believing in right reason, and having faith in the progress of humanity towards perfection, and ever labouring for this end, we grow to have clearer sight of the ideas of right reason, and of the elements and helps of perfection, and come gradually to fill the framework of the State with them, to fashion its internal composition and all its laws and institutions conformably to them, and to make the State more and more the expression, as we say, of our best self, which is not manifold, and vulgar, and unstable, and contentious, and ever−varying, but one, and noble, and secure, and peaceful, and the same for all mankind,−−with what aversion shall we not then regard anarchy, with what firmness shall we not check it, when there is so much that is so precious which it will endanger.

Nevertheless, though for resisting anarchy the lovers of culture may prize and employ fire and strength, yet they must, at the same time, bear constantly in mind that it is not at this moment true, what the majority of people tell us, that the world wants fire and strength more than sweetness and light, and that things are for the most part to be settled first and understood afterwards. We have seen how much of our present perplexities and confusion this untrue notion of the majority of people amongst us has caused, and tends to perpetuate. Therefore the true business of the friends of culture now is, to dissipate this false notion, to spread the belief in right reason and in a firm intelligible law of things, and to get men to try, in preference to staunchly acting with imperfect knowledge, to obtain some sounder basis of knowledge on which to act. This is what the friends and lovers of culture have to do, however the believers in action may grow impatient with us for saying so, and may insist on our lending a hand to their practical operations and showing a commendable interest in them.”

It is a point made over several editions in this newsletter. There’s value in custom and tradition of where we are today. It doesn’t need to be changed for an imaginary hoary past, nor do we need a ‘solution’ to a social problem of today that we think will unlock our glorious future. There’s very little to be achieved in stirring things up to assert an identity that might be more collective than individual. The values of liberalism or conservatism aren’t served here. There’s a status quo of culture that’s vital to be maintained so that true progress can be made that will lift the millions out of poverty in India. That’s the right kind of moral imperative to put our weight behind.  

India Policy Watch #2: What do Calls for Redistribution get Wrong?

Insights on burning policy issues in India

- Pranay Kotasthane

The last two weeks witnessed a familiar discussion on inequality. The NGO Oxfam International came out with another report Inequality Kills: India Supplement 2022. In response, some commentators questioned the report’s main recommendations (1,2). Regardless, it will continue to be cited and used in support of redistribution and higher rates of taxation.

Like many other reports of this genre, it gets the problem definition right but the proposed solutions are simplistic and betray the lack of public finance knowledge. What fascinates me is how calls for more taxes are written, discussed, and debated without an understanding of public finance and public policy fundamentals. So here’s an attempt to rectify this flaw in such reports.

To begin with the problem, the Oxfam report argues that "India’s governance structures promote the accumulation of wealth by a few while failing to provide safety nets to the rest of the population." Not much to contest here. The cited evidence — and one that makes for a good narrative — is that "The number of Indian billionaires grew from 102 in 2020 to 142 in 2021, the worst year yet for India during the pandemic. This was also the year when the share of the bottom 50 per cent of the population in national wealth was a mere 6 per cent."

Based on this problem statement, the proposed solution is "We call upon the government to redistribute India’s wealth from the super-rich to generate resources for the majority by reintroducing the wealth tax and to generate revenue to invest in the education and health of future generations by imposing a temporary one per cent surcharge on the rich for health and education."

Now, let me begin by stating what I agree with this report. It is true that COVID-19 has been unequal in its impact. RSJ has written about the K-shaped recovery here, here, and here in this newsletter. This pandemic has increased the monetary and non-monetary poverty headcount ratio, but we will know for sure only after the next round of the National Family Health Survey. For the next year or so, higher direct transfers to the poor, subsidised food, more credit, and higher employment guarantee scheme expenses are all desperately needed.

For the authors, the solution to this rise in poverty is simple: raise more taxes from the rich and distribute that money to the poor.

There are at least four problems with this line of thinking.

One: We’ve Been Here Before

“Taxation is also a major instrument in all modern societies to achieve greater equality of incomes and wealth. It is, therefore, proposed to make our direct tax system serve this purpose by increasing income taxation at higher levels as well as by substantially enhancing the present rates of taxation on wealth and gifts.”

The above lines seem to have been taken out straight from the Oxfam report. They aren’t. They are from Indira Gandhi’s 1970-71 budget speech. This line of thinking led to eleven brackets of “progressive” personal income tax, with rates varying from 10 per cent to 85 per cent. Further, a 15% surcharge on the super-rich meant that anyone with an annual income of Rs 2 lakh or more had to pay a marginal tax rate of 97.5 per cent. There was also a wealth tax of 5 per cent. Corporate taxes varied in the range of 45 - 65 per cent.

Surely, if the problem of poverty could be solved merely by taxing the rich, garibi would have been hataoed by the 1970s itself. Instead, these confiscatory rates of taxation went against the pursuit of equality in three ways.

Unsurprisingly, there was large-scale tax evasion. Who in their right minds will pay such high rates of taxes? I mean, people still fudge their income tax returns. Second, the rich took their businesses outside India, jobs were lost, and we learnt another important lesson: as capital is more mobile than labour, high taxes on capital end up being a tax on labour. Third, these high nominal rates of taxes didn’t translate into more revenue for the government because of various exemptions to companies. The tax policy was flogged in service of so many objectives —each requiring exemptions— that companies could offset much of their taxes against these allowances.

So, we have tried these measures before and failed. Not just in India, the highest marginal tax rates in UK and US were at the 90 per cent mark in the 1950s. Gradually, all these countries came to the realisation that redistribution should be one of the goals of the expenditure side of the budget. Raising revenues shouldn’t be tasked with this goal at all. Broadening the base, lowering the tax rates for all individuals and companies, and getting rid of tax exemptions is more progressive than highly progressive taxation. As we have written before, Robinhood Taxes don’t work.

Reports asking for higher and newer taxes must explain how their magic potion is going to have different results this time around.

Two: The High Costs of Raising New Taxes

I doubt whether the authors have tried to understand what it means to raise wealth taxes. Raising any tax is full of friction. Three costs are involved: administrative, compliance, and economic efficiency. The objective of any tax should be to increase revenue while minimising these costs. Wealth taxes fail on all three counts. Measuring wealth is not easy. For instance, estimating the cost of the artwork owned by a rich family requires the tax authority to have expertise in art, thus the administrative costs are significant. Next, people don’t have all their money in easily visible financial assets such as stocks. Some of the assets could be notional (such as equity in early-stage start-ups), some other assets could be outside India and still others in immovables such as real estate. Complying with wealth tax regulations on each of these assets isn’t easy. Finally, such a tax will have economic efficiency costs — people will transfer wealth (notionally) to relatives, take money out of India, and invest in assets that are difficult to value.

The burden of proof lies on the authors to show how the proposed taxes will generate more money than the costs required for their implementation.

Three: The Government Doesn’t Rely on Taxes Alone

Many people seem to think that the government is not spending on support for the poor because its tax revenues are less. Hence the calls for new taxes so that the urgent support to the poor may become viable. Check these lines from the Oxfam report:

“Instead, the burden of taxation in India currently rests on the shoulders of India’s middle class and the poor and not addressing the proposal for a one-time tax on the wealthy, for COVID-19 recovery, has resulted in the government using the only other available option i.e., raising funds through indirect tax revenue which penalises the poor.”

This again betrays a lack of understanding of government finances. The fuel sustaining the additional government expenditure in the last two years is not tax revenue but debt. In other words, nothing stops the government from spending more on urgent and immediate support for the poor adversely impacted by the pandemic. The additional borrowing will lead to higher taxes in the future, but it can be justifiable given the once-in-a-century situation we are facing now.

Four: Law of the Instrument

"I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail". These memorable words from Abraham Maslow indicate a cognitive bias that is at play in these calls for redistribution. What really hurts many people is to see a select few gain access to immense wealth and power. Redistribution becomes the “hammer” solution to prevent the concentration of money and power in a few hands. But if the core problem is to solve the phenomenon of the super-rich gaining more money and power, other better solutions exist.

In recent times, it is indeed the case that market concentration has increased across industries in India. So, if the super-rich are using anti-competitive means to eliminate competition and gain monopoly power, we need better competition laws, not more wealth taxes. Second, if the government wants more money from the super-rich, all it needs to do is to free the tax policy from the burden of several exemptions provided for other goals such as balancing regional development, increasing investment, generating employment, or promoting small-sector industries. A policy that tries to attain several objectives at once achieves none.

Growth, not Redistribution is the Answer

These four problems apart, inequality crusaders must realise that taking money from the billionaires through a new surcharge is not going to make any significant dent in poverty in India. The only solution is economic growth, as we have discussed many times before in this newsletter.

Much of the global inequality is between countries and not within countries. Across countries, variations in many important dimensions — literacy, life satisfaction, and health outcomes— can be explained by one single variable: incomes. Tackling inequality then essentially means increasing the incomes of poorer countries rapidly. Economic growth is a moral imperative.

HomeWork

Reading and listening recommendations on public policy matters

* [Article] Meanwhile, France has moved to ban hijab in competitive sports. "We must have the courage, wherever possible to do so, to preserve the unity and cohesion of the Republic," said Jaqueline Eustache-Brinio, a senator from the right-wing Les Républicains party.

* [Article] Do not miss this excellent article on global inequality and its implications for economic growth by Max Roser.

* [Paper] To understand and appreciate India’s experience with tax policies, read this India Policy Forum 2005-06 paper by Rao & Rao.

* [Article] Rajesh Rajagopalan has a characteristically clear-minded article on the implications of the Russia-Ukraine conflict on India. In this one article, he demolishes many myths governing India’s relationship with Russia.

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