When the election season of 2019 is written about in history books, one thing will stand out: the competitive welfarism that parties across the board have promised to voters.
The reason perhaps, is that we are going into the polls at a time of deep economic distress, especially for the poor. There have been unprecedented job-losses, the real income of farmers has gone down, and rural wages have collapsed.
Both the Modi government, and Congress President Rahul Gandhi recognise this, as do several state governments. That is why, along with subsidised food, every political party is promising some sort of cash support to poor families. If Prime Minister Modi is giving Rs 6,000 per year to each small and marginal farmer, Rahul Gandhi has promised 12 times that amount to the poorest 20 percent.
Does Research Back Views of Conservative Economists?
But conservative economists and the middle-class don’t like this. They say, giving ‘free money’ to the poor will make them lazy. They will stop working, and the unemployed will stop looking for work. Seems logical, doesn’t it?
However, do studies back this view? In 2015, economists from MIT and Harvard looked at data from seven different countries, where the poor were being given regular cash assistance.
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In most cases, these were tagged to some condition, such as sending children to school or getting them vaccinated. In one case, the transfer was entirely unconditional.
What did the study find? No, people didn’t stop working nor did they get lazy and work fewer hours. The maximum drop in employment was 1.6 percent, while in two countries, employment went up by about 0.9 percent. The change is statistically so insignificant, that it can be treated as no change at all.
No Real Proof that ‘Free Money’ Makes the Poor Lazy
Even more direct data comes from an experiment done between 1974 and 1979, in a small Canadian town called Dauphin. The poor in the entire town were given basic income assistance, through cash transfers. No one worked less, except for young mothers who wanted to spend more time with their babies, and teenagers who could now go back to school. The health impact of income stability was so great, that hospital visits dropped by 8.5 percent.
Around the same time, US President Nixon conducted similar experiments in four cities, covering 7,500 people. Critics predicted that those getting the money would stop working. Surveyors then asked the beneficiaries of the scheme to report how much they were working, and it turned out, that employment levels and hours worked had, indeed, dropped. Here was supposed ‘proof’ that free money makes people lazy.
Later, researchers, cross-matched the ‘self-declared’ survey data with actual earnings numbers on government records. In one case, the drop in employment disappeared completely, and in the others, the drop was much lower than the survey had reported. Even those who had dropped out of the workforce, had done so either to study or develop skills, or to wait for better employment opportunities. Here too, school enrolment of teenagers shot up 25-30 percent.
Does Income Tax Really Pay for What the Govt Spends?
Of course, these experiments took place more than 40 years ago. and they were done in other cultures. Naysayers say India is more corrupt. The money spent on the poor will be siphoned off by netas, babus and touts. And, even if the poor do get a part of it, who is going to foot the bill?
Income-tax payers say they’ve had enough of politicians using their hard-earned money to give freebies to the poor. But, does income-tax really pay for what the government spends? Income-tax is projected to be just 24 percent of what the Centre expects to collect in taxes this fiscal.
It will keep 2/3rds of it and give the rest to the states. But, the government spends much more than its revenues. So, if you consider the Centre’s total expenditure for the fiscal, income-tax will account for just about 15 percent. The rest will come from indirect taxes like excise duties, GST, customs duties on imports, corporate taxes and borrowings. Economists call indirect taxes ‘regressive’, because everyone – rich or poor – is taxed at the same rate. Corporate taxes aren’t very different, because they are ultimately factored into the way companies price their products.
The Poor Have Been Paying More Than Their Fair Share of What Govt Spends
When a household help takes the local bus to go to work, she pays a tax on the bus ticket she buys. If she buys a packet of biscuit for her daughter, there’s a tax on that. A small bar of soap, the pre-paid SIM card, a bulb, and everything else that she buys from the local kirana shop is taxed. Whether it is an indirect tax like GST, or excise duty on petrol and diesel, or it is the corporate tax component hidden in the cost price of a product, the poor pay taxes everyday.
And who pays for government borrowings? What the government borrows from the public, shows up on our ledger as private savings in the form of government bonds. The income-tax paying middle-class is its biggest beneficiary. We get assured returns on bonds, and if interest rates go up, we get better returns on our debt investments.
On the other hand, much of what the government will spend, will go to paying salaries of income-tax paying government servants, building and maintaining infrastructure in our cities, constructing highways for businesses to cart their goods across the country. In other words, a bulk of the government’s expenditure will be directed towards things that we, income-tax payers, will use.
So, dear income-tax payer, the poor have consistently been paying more than their fair share of what the government spends, because they too pay indirect taxes.
So, don’t worry. Even now, it is the poor who will continue to bear a big part of the fiscal burden of the subsidies they get.
(Aunindyo Chakravarty was Senior Managing Editor of NDTV's Hindi and Business news channels. He now anchors Simple Samachar on NDTV India. He tweets @AunindyoC. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)
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