Intergenerational equity as tax devolution criterion
Introduction
- Political and Economic Significance: The distribution of Union tax revenue among States in India is a crucial issue discussed periodically, driven by political considerations and economic principles.
- Role of Finance Commission (FC): The FC revisits and determines the horizontal distribution formula every five years, emphasizing equity over efficiency in allocating resources among States.
Intergenerational Fiscal Equity
- Concept Definition: Intergenerational equity ensures that each generation pays for its public services without burdening future generations through excessive borrowing.
- Current Scenario: High-income States tend to finance a larger share of their expenditure through own tax revenue, whereas low-income States heavily rely on Union financial transfers. This disparity leads to varying levels of fiscal management and debt.
Intragenerational Equity
- Objective: Intragenerational equity aims to provide equitable public services per tax payment across all States, regardless of their economic status.
- Indicators Used: The FC uses indicators such as per capita income, population, and area to distribute Union financial transfers, reflecting states'' differing needs and fiscal capacities.
Conflicting Equities Addressed by FC
- Equity Variables: Current distribution formulas prioritize per capita income, population, and area, which sometimes fail to accurately capture states'' fiscal situations.
- Need for Revision: There is a call to include more fiscal variables to incentivize fiscal discipline and efficiency among States, thereby ensuring better utilization of Union financial transfers.
Fiscal Challenges and Recommendations
- Fiscal Responsibilities: Every state has a Fiscal Responsibility Act to limit deficits and manage public debt. However, reduced Union financial transfers sometimes force states to breach these legal limits.
- FC''s Role: The FC should assign greater weight to fiscal indicators and incentivize tax efforts and expenditure efficiency through increased Union financial transfers.
- Outcome: This approach would promote intergenerational fiscal equity and sustainable debt management across states.
Conclusion
- Balancing Equity and Efficiency: The FC''s role in balancing intragenerational and intergenerational equity is crucial for equitable development across states.
- Recommendations: By revising the distribution formula to include more fiscal indicators and incentivize fiscal discipline, the FC can effectively address conflicting equity issues and promote balanced development.
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