Tax Exemptions and Tariffs

Years back, I remember my dad asking why there are so many different tax rates and so many different exemption categories. (Yup, he was calculating his tax returns at that time; hence the frustration). I had gone into the standard reasons about why it is often a good thing to have those exemptions: after all, such exemptions often encourage investment in activities like infrastructure development. He had countered that it is equally often because of corporate pressure to provide loopholes to reduce their taxation. Which, of course, is true.

But corporate driven tax reductions is not always a bad thing, as Ireland can tell you. Ireland’s corporate tax rate is lower than anywhere else in Europe. No wonder than that Google’s European headquarters is in Ireland! And it’s not just Google that Ireland attracted: plenty of other MNC’s go to Ireland for the same reason. That in turn translates to more investments in Ireland. And more jobs. That’s what Ireland calls a win-win.

Then there is the opposite side of the tax story: tariffs. Governments impose tariffs on certain products or products from certain countries. In other words, governments artificially try to raise the price of certain products. This, of course, encourages smuggling (remember the bad guys from all those old Bollywood movies?). Or cases like “honey laundering”. What’s that, you ask? The US government imposed tariffs on honey imported from China. So what did this German company who imported honey to the US do? They started shipping Chinese honey under Indian labels!

I am not saying smuggling or what the German company did is OK. But when governments create artificial price hikes, it encourages more people to break the rule. Like not disclosing stuff at customs. Proponents of free markets suggest doing away with all such measures. Let the market decide, they say.

But given that the 2008 recession is a fallout of unbridled free markets with its buyer beware attitude, that’s obviously not the best approach either. And so governments will muddle along trying to find that golden middle path. And they will stumble, create loopholes, and yes, make tax calculations for us that much more complicated.