Consequences of the Difficulty of Taxing Agriculture

3. Consequences of the Difficulty of Taxing Agriculture • Leads to insufficiency of public revenues in the very regions of the world where public goods are chronically under-supplied. • Implicit taxation of agriculture was the typical response through: • Import-protected industrialisation • Over-valued local currencies reducing domestic currency earnings from agricultural export. • Input subsidy appeasement comes next, interlocked with implicit taxation. • Input subsidies are sticky; survive implicit taxation.

4. Features Of Agriculture Which Make It Hard To Tax • Spatial spread • Norm-based methods called for by information vacuum in developing countries (except in plantation agriculture) due to • Absence of standard account-keeping. • Payments not routed through banks. • Norms cannot be uniform across regions and crops. Also must be flexible enough to accommodate weather-related shocks.

5. Reasons for Revenue Failure of Agriculture Taxation inDeveloping Countries • Wrong form of taxation: modern income tax based on self-declaration, symmetrical to that used for industry  asymmetrical revenue outcomes. • Wrong level of government: national rather than local.

6. Agricultural Taxation In India • Vested with subnational State (above local) governments. • State governments levy: • The land revenue, a land-based levy, at low and stagnant nominal rates. Presumptive in conception, it predates the modern income tax introduced in 1886. • An Agricultural Income Tax, a conventional levy based on self-declaration. • The Agricultural Income Tax is levied only by 6 out of 25 (now 28) states, those with plantations.

7. Agricultural Taxation In India • Even on plantation agriculture, there has been a natural evolution towards a land-based levy, voluntarily opted for by the majority of assessees. • Both together yield revenue amounting to a mere 0.4 percent of tax revenue in the country aggregating across all levels of government. Of this, 90 per cent is sourced from the land revenue, despite low and stagnant nominal rates.

8. A Possible Norm-based Crop-specific Supplement to the Land Revenue • Crop-specificity essential because of factor specificity  large difference in returns persisting in equilibrium. • Calls for a crop-specific taxable surplus parameter as follows ij : [TR-TC] ij /TR ij • The parameter ij clearly requires stability in the cost-revenue relationship. • This further requires that the parameter be defined with reference to a yield range over which such stability obtains.

9. Jurisdictional Retention • Within-sector retention of any resources raised from agriculture for infrastructure development and productivity-enhancing land improvements within the sector. • Carries an economic efficiency justification (Newbery, 1992). • Key to inducing voluntary compliance with an agricultural tax. • Recent work on the joint growth and poverty outcomes of alternative macroeconomic policy configurations point to the centrality of rural infrastructure, and road connectivity in particular, for poverty-reducing growth (Fan, Hazell and Thorat, 2000).

10. Feasibility of the Levy • Requires three operational properties: • parsimonious information requirements for assessment; • systematic, as distinct from discretionary, catastrophe exemption provision, given the absence of perfect risk markets; • assessee acceptance. • Selective, not universal, coverage confined to crops yielding returns above a specified floor.

11. Designing the Levy • If field surveys identify a clear threshold defining the lower limit of the stable cost-revenue domain, this can then serve as the reference yield and also as the catastrophe-exemption yield, below which the cultivator will be exempt from having to pay the tax. • In the absence of field surveys, ij will have to be anchored to an average crop yield from secondary data sources on cost of cultivation. In that case, the exemption threshold will have to be sourced elsewhere. Also, ij may itself need adjustment to changing average crop yields over time.

12. Crop-Specific Levy Rates Per Hectare • The parameter ij can then be applied to any current year, t, to obtain the levy rate Lijt as follows: TRijt = Yijt x Pijt Lijt = r X ij x TRijt Rijt = Lijt x Aijt • The only recurring information required for assessment purposes of an in rem levy: • A listing of cultivators with land sown to each of the crops in the selected subset for each season; • Identification of those cultivators in each list whose yields fall below a stipulated exemption yield (failure) threshold.

13. Adjustment Parameter i (Optional) • If ij requires adjustment to crop yield variations over time, a set of coefficients, i for the ith crop, will be needed thus: ijt = i Yieldijt • The adjusted taxable surplus parameter at yields different from the anchor yield then is: ijta = ij b + ijt

15. Symmetric/Asymmetric Adjustment • Symmetric adjustment across yield changes around the anchor yield implies adjustment for all values of ij > or < 0. • Asymmetric adjustment provides reprieve for yield shortfalls alone, with no enhancement for higher yields, and is done only for yields below the anchor yield, thus: ijta = ij b + i Yieldijt for  Yieldijt < 0 ijta = ij b for  Yieldijt > 0 • Asymmetric adjustment effectively presumes the anchor yield to be a threshold beyond which stabilises.

16. Properties of the Proposed Levy • Agricultural land, is in fixed supply, and unequally distributed. Therefore a fair tax based on potential returns to land is both efficient and equitable. • The tax is grounded squarely and explicitly on current yields, whether from primary field surveys or secondary data sources, so does not overestimate present-day ability to pay. • There is a possible trade-off between the crop-specific tax as initially specified with input subsidies in place, and a lower tax in a package with corrected input prices, which can be used to induce subsidy removal.

17. Acceptability • Progressivity is embedded in the variation across crops in levy rates per hectare. But the levy rate itself is in rem, not in personam. • Poorly endowed regions without revenue prospects from such levies can be granted entitlements to independent and transparent grants. Grant entitlements can be objectively determined from acreages sown to crops designated as taxable in the state.

19. Vesting Rights to Tax Agriculture with Local Government • Carries the following advantages: • Decentralisation of points of levy suits the spatial spread of agriculture. • Variable rates of levy, in accordance with local willingness to pay. • Taxes on real property are conventionally assigned to the local fiscal domain. • Tax exporting is kept in check by competition between jurisdictions. • Recent empirical evidence suggests that decentralisation is associated with lower corruption, and is growth-enhancing. • All above advantages are reaped only when local elections are free and fair.

20. Local Government in India • Resulting from the Constitutional Amendments of 1992 there are 247,033 local rural bodies, aggregating across a three-tiered rural governance structure. Of this total, 240,588 are at village level. • On average across all states, there is one Village Panchayat for every 3000 rural inhabitants. • Local government is governed by legislation enacted at State-government level, which among other things requires budgetary balance at local level. • State Finance Commissions, a five-yearly requirement mandated by the Constitutional Amendments, make possible a continual redefinition over time of local fiscal rights.