Among the many myths commonly held by the Indian middle class, perhaps the most prevalent and most tenacious is the idea that it - along with the rich, of course - pays all the taxes that are received by the Government. So persistent is this myth that it then forms the basis of further propositions that this group should be given greater say over the disposition of tax revenues.
 
This tendency is exemplified by a prominent national newsmagazine, which recently ran a cover story declaring that the citizens who paid taxes were unhappy over the way in which the money was used. Those interviewed were exclusively from the middle class or richer sections, and in their replies they assumed the superior role of those who bear the brunt of government taxation. This in turn meant that they could insist that democratic functioning required that their opinions be given a far greater say in the government’s fiscal management. Some of those quoted even voiced the sentiment that they should be allowed not to pay taxes as part of their democratic right, since they were dissatisfied with the quality of government services provided and were willing to provision these services from private sources instead.
 
The misconception about incidence of tax burden is not one that is confined to laypersons with little knowledge of the basics of public finance. Even in the Economics Departments of major universities, it is still possible to observe learned theoreticians present abstract economic models in which an important underlying assumption is that the poor pay no taxes and are simply recipients of government largesse which is financed by taxing the rich.
 
At one level of course, the idea seems intuitively plausible, which is probably why it is so widespread. After all, taxation is well known to have a redistributive function, which is actually seen as a valuable function by many. And surely it is not so unrealistic to suggest that the richer and middle classes provide the bulk of tax revenue since they are the ones who pay direct taxes (which are, in turn, proportionate to income).
 
There are several problems with this argument, however, and at least three which are significant. The first is that, despite popular middle class perception, in fact the Indian economy has one of the lowest rates of taxation in the world, in terms of aggregate tax as a proportion of national income. Not only is it already very low in terms of international comparison, but it has fallen over the 1990s.
 
The ratio of Central Government tax receipts to GDP was only 11.3 per cent in 1989-90; by 1999-2000 it had fallen to the miserable proportion of 8.8 per cent. Even if taxes levied by the State Governments are included, the total tax-GDP ratio was still only 17 per cent in 1989-90 and fell to 14 per cent by 1999-2000. Compare this to tax-GDP ratios of more than 40 per cent in most developed countries, and above 30 per cent in most of Asia. Even in the countries of Sub-Saharan Africa, well known for their continuing fiscal crisis, tax-GDP ratios are typically in excess of those in India.
 
Not only that, but in fact the bulk of tax revenue in India comes in the form of indirect taxes. Indirect taxes were on average more than 70 per of Central Government tax revenues through the 1990s, and in fact would have been even more but for the decline in customs duties related to import liberalisation over this period.
 
For the state governments, indirect taxes amount to more than 95 per cent of their total tax collection. Thus, if both  State and Central taxes are taken into account, indirect taxes amounted to 82 per cent of total taxes and direct taxes accounted for only 18 per cent.
 
So it turns out that the dominant part of tax revenues comes from indirect taxes, which are accepted to be broadly regressive and affect lower-income groups disproportionately. It is sometimes argued that the rich - or the upper-income groups - pay the bulk of the indirect taxes as well, because they spend more on consuming items (by definition, almost). This is not just debatable but in all probability wrong, but of course a refutation would require detailed analysis of the commodity-wise tax incidence and a consideration of the spending patterns of households according to size classes of expenditure, which cannot be attempted here.
 
Nevertheless, the pertinent point is that, since by far the major part of taxes are in the from of indirect taxes which are known to be regressive, it is likely that a disproportionate part of the tax burden actually falls on the poorer households. In other words, it is likely that poorer people actually pay out a larger share of their income in the form of taxes, than the rich. This complete reversal of the common middle class notion is the one which is likely to be closer to the truth.
 
Of course, even the pattern of indirect taxation itself can have particular distributive implications, and can vary depending upon the choices made by the fiscal authority. To take an example, in the latest Central Government Budget, there was a “rationalisation” of excise duty rates which was widely applauded in the financial press and by middle class commentators. This measure merged the three rates of 8, 16 and 24 per cent into one common rate of 16 per cent for all items (barring a very select few).
 
This sounds quite harmless and even desirable at one level; but what did it imply in distributive terms ? Luxury commodities such as cars, air conditioners, durable consumption goods and so on saw the rate of duty fall from 24 per cent to 16 per cent. By contrast, a whole range of items of mass consumption, ranging from soaps and local detergents of common use to certain food items, saw the rate of duty double from 8 to 16 per cent.
 
This is of course quite a stark example of how even indirect taxes can become an instrument for transferring income from the poor to the rich, quite apart from the fact that they are fundamentally regressive anyway. But it is very much a part and parcel of general fiscal management over the past decade, where the burden of taxation has been borne by a large mass of population that then receives very little benefit in terms of the direction of state expenditure.
 
Despite, this, the myth persists, and the upper income groups continue to see themselves as those bearing the tax burden for the rest of the economy. In a sense, the unwillingness of these groups to pay taxes - which is largely responsible for the low tax-GDP ratios in the Indian economy even at existing tax rates - reflects a more basic problem with our elites. This is the growing tendency to extract as much as possible from the system, while resisting any attempts to put something back in.
 
Only when this tendency is firmly resisted, and basic discipline in terms of respecting the rule of law in taxation is enforced, would we have anything approaching the minimal requirements even for an efficient capitalist system, which is otherwise what our middle classes seem so keen to espouse.