INTRODUCTION

As a human being has sprung out of nature, it is the fundamental principle of

nature that in order to move forward, one has to grow according to requisites of
environment. Therefore growth is an integral part of almost every system in the
country whether it be governed by nature or by human beings themselves.

A growth may differ in various sectors depending on the needs of the concerned
sector and therefore be termed accordingly. For instance a growth in financial
capacity of a person may be termed as Financial Growth or a growth in spiritual
arena of a person may be termed as Spiritual Growth. Economic Growth is also
a term widely used in the world majorly in financial sectors. Economic Growth
is nothing but a growth in economy of a state. A state has to have a constant
growth in its economy which will not only make it stronger but also get it
categorized in the developed economy.

This project will provide a unique perspective regarding the impact of economic
growth and the importance of economic growth. This project will also provide
the ways in which we can foster the economic growth as well as the factors that
hinder economic growth and ways to curb them.

After discussing in detail the economic growth and the key areas related to it,
this project will throw a light upon the role of Tax in the economic growth of
the country. Tax policy is one of the key features in the economic growth. A
state cannot expect to have a steady and continuous economic growth unless it
has a good tax policy affirmed by the citizens of the country.

1
After having discussed the Economic Growth and role of Tax in Economic
Growth, this project will also provide you with the idea of Tax-Equity and
Redistribution of Income and Wealth in the last segment.

2
 Economic Growth
Economic growth can be defined as an increase in the capability of the economy
to produce different services and products at different periods of time. It is
similar to economic development. In fact, economic growth is a quantitative
indicator of economic development. Economic growth is closely linked with the
growth of the general welfare: increase of life expectancy, quality of health
care, education, reduction of working hours, etc.1

According to Webster’s online dictionary, ‘Economic growth is a steady growth

in the productive capacity of the economy and so a growth of national
income’.2Economic growth is the increase in the inflation-adjusted market value
of the goods and services produced by an economy over time. It is
conventionally measured as the percent rate of increase in real Gross Domestic
Product (GDP). The basic objective of Economic Growth is broad-based
improvement in the economic and social conditions of our people so as to
achieve better quality of life for them.

1
Information Technology Act 2000, India, available
athttps://bestessayhelp.com/examples/economics/economic-growth-essay-sample (Visited on
Oct 30, 2018)
2
Information Technology Act 2000, India, available at
Webster-dictionary.com (visited on Oct 30, 2018)
3
 Objectives of Economic Growth

1. To Achieve a Higher Rate of GDP Growth –

The first and foremost objective of the economic growth is to achieve a higher
rate of GDP growth so as to raise the living standards of our people. Rapid
growth of total GDP or per capita income is considered necessary because it
ensures an expansion in the productive capacity of the economy without which
broad based improvement in living standards of the people is not possible.
However, it should be recognized that faster economic growth, though
necessary, is not a sufficient condition for raising the living standards of our
teeming millions. This is because one can easily imagine a growth process
which may not be sufficiently inclusive to ensure a spread of benefits to the
mass of our population.

There are three reasons why economic growth is necessary for raising the living
standards of the population.

First, rapid growth of economy ensures a higher expansion in total income and
production which, if growth process is sufficiently inclusive, will make
available a larger output of goods and services to be consumed by the people
and thus raise their living standards.

Secondly, rapid economic growth generates more employment opportunities

and income enhancing activities of the people, provided labour-saving
technologies are not used for production of goods both in the industrial and
agricultural sectors.

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Third, higher GDP growth is important because it generates higher revenues for
government which help to finance anti-poverty programmes started by the
government.

2. To Eradicate Poverty and Unemployment –

The second important objective of the economic growth is to eradicate poverty.

In AmartyaSen’s approach to development, poverty should be viewed as
deprivation of basic capabilities rather than merely as low income. The
existence of poverty or deprivation of basic capabilities is reflected in hunger,
significant undernourishment/especially of children, permanent morbidity,
widespread illness, and lack of basic education and other failures. Though
economic growth is necessary for elimination of poverty but is not a sufficient
condition for it because it is related to income distribution in a society as well.

Related to issue of poverty is the question of unemployment which exists on a

large scale in developing countries, especially in labour-surplus countries such
as ours. Chronic and long-term unemployment exists in the developing
economies because due to higher population growth relative to capital formation
it has not been possible to absorb the increasing number of workers in
productive employment resulting in large-scale unemployment in developing
countries.

Gainful employment is the means of livelihood for the masses of the population.
The growth of employment opportunities needs to be accelerated both in
manufacturing and services sectors to provide employment to increasingly
educated population which has high expectations and aspirations.
Unemployment leads to the feelings of worthlessness and frustration among the
youth leading to the increase in incidence of crime in the society.

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 3. To Expand The Freedoms Enjoyed by The People –

The other important objective of economic growth, as has been explained in

AmartyaSen’s approach to development and Goulet’s core values, is to expand
the freedoms that people of a society enjoy. Growth of GDP or of individual
incomes or industrialization or technological progress are merely means to
expanding human freedoms but freedoms depend on other factors as well.

If the objective of expansion of freedoms is to be achieved, the various sources

of unfreedom such as lack of public facilities of education and healthcare, denial
of political liberty and basic civil rights (such as liberty to participate in public
discussion) and denial of equal rights to women in the society have to be
removed.3

4. To Reduce the Burden of Internal and External Debts –

Economic Growth helps a nation to adopt the self-reliance policy. Poor nations
like Pakistan are loans and grants receiving nations. The most of the developing
countries are receiving domestic as well as foreign loans for their infrastructure
development. Another aim of economic growth is to reduce the burden of debts
so that government can adopt self-reliance policies for the development of the
country without depending on any other country for monetary needs. This can
be achieved through higher economic growth because higher GDP growth will
generate higher revenues for government.4

3
Information Technology Act 2000, India, available
athttp://www.economicsdiscussion.net/essays/economic-development-essays/essay-on-
economic-development-in-india/29939 (visited on Oct 30, 2018).
4
Information Technology Act 2000, India, available
athttp://ahsankhaneco.blogspot.com/2011/12/what-are-major-motives-and-objectives.html
(visited on Oct 30, 2018).
6
 Obstacles to Economic Development

1. Lack of Infrastructure –

Economic growth in the developing countries has been impeded by inadequate

availability of infrastructure. Infrastructure includes power, irrigation, transport
and communication. It may also include credit facilities available from banks
and other financial institutions and also the facilities for the education and
training of labour.

The availability of these infrastructures facilitates production in industry,

agriculture and other productive sectors of the economy. These infrastructures
give rise to external economies and thereby cause reduction in costs, facilitate
production and increase efficiency in all productive sectors of the economy.

Power (electricity) is used in the production process these days both in industry
and agriculture.It is now too well known in India that non-availability of
adequate amount of power lowers industrial and agricultural development.
Likewise, the existence of the means of transport is essential for transportation
of raw materials to the place of production and to sell the goods produced too
far off places. In fact, the availability of transport widens the market for goods
and thereby encourages their production. Likewise, the availability of adequate
irrigation facilities is necessary to raise agricultural output.

Likewise, there is a lack of adequate credit facilities or funds. For an

entrepreneur who wishes to undertake business or set up some factory he should
have sufficient funds to finance it. Credit facilities are also badly needed by
farmers for agriculture. The growth of agriculture suffers if adequate credit
facilities are not available. Therefore, the Government in the developing

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countries should give high priority to develop the facilities of providing
adequate credit and finance for the development of industry and agriculture.5

2. Demonstration effect –

Demonstration effect leads to initiation and imitation of superior consumption

standards which increases their propensity to consume and consequently reduce
their capacity to save.

Nurkse laid great stress on this new theory of consumption and saving. We
ordinarily think that a man’s consumption depends on his income. But that is
not quite correct. A person’s consumption does not merely depend on his own
income but also on the incomes and consumption behavior of his friends and
relations with whom he maintains social contacts.

A man finds some of his friends using colour televisions, luxury cars, costly
mobiles, refrigerators, air-conditioners, electric hot plates, and electric washing
machines and so on and experiences a sort of restlessness and a craving is
generated in his mind to enjoy these amenities. These desires for conspicuous
consumption generally outrun the consumer’s means. Thus consumption
behaviour of individuals depends not on absolute real income but on relative
levels of real incomes. It does not depend on what we can afford but what the
others afford and enjoy. This is what Duesenberry calls ‘demonstration effect’.

The intensity of this demonstration effect on saving seriously impairs a person’s

capacity to save. He may save less even if his income has gone up; the ability to
save may have increased but the willingness to save has decreased. It has been
estimated that 65 per cent of the Indians do not save. The reason is not that they

5
Information Technology Act 2000, India, available
athttp://www.yourarticlelibrary.com/essay/obstacles-to-economic-development-in-
india/39193 (visited on Oct 30, 2018).
8
are too poor to save but that they are adopting better ways of living seen among
the upper classes. And this decline of willingness to save will itself work as a
detriment to the growth of an individual and if there is no growth of an
individual, there can be no growth of the nation as a whole.6

6
Information Technology Act 2000, India, available at
http://economical-principle.blogspot.com/2012/01/obstacles-to-economic-growth.html
(visited on Oct 30, 2018).
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 Tax and Economic Growth
Tax is a one of the popular topic in economics. Tax as we know is a main
source of government revenue and the collection of the tax will be used by
government for development purposes. Tax system is the combination of the tax
policy and tax administration which is the central of the successful implication
fiscal policy and the overall management of the public sector. According to
Martinez-Vazquez, (2011), if the tax revenue is less, the government will have
difficulties to spend in critical areas for economic growth and also for the
development of the country.7

Tax systems are primarily aimed at financing public expenditures. Tax systems
are also used to promote other objectives, such as equity, and to address social
and economic concerns. They need to be set up to minimize taxpayers’
compliance costs and government’s administrative cost, while also discouraging
tax avoidance and evasion. Despite cross-country differences in the tax
structure, most OECD countries rely on three main sources of tax revenues:

a. personal and corporate income taxes,

b. social security contributions and
c. taxes on goods and services.8

7
Information Technology Act 2000, India, available
athttp://www.ftms.edu.my/journals/pdf/IJABM/Nov2016/242-250.pdf (visited on Oct 30,
2018)
8
Information Technology Act 2000, India, available at
https://www.oecd-
ilibrary.org/docserver/241216205486.pdf?expires=1540902940&id=id&accname=guest&che
cksum=BD3BFB1BD31D3D9CE8C4C150D82C2D1B (visited on Oct 31, 2018)
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 Role of Taxation in Economic Growth
1. Resource Mobilization

Taxation enables the government to mobilize a substantial amount of revenue.

The tax revenue is generated by imposing: Direct Taxes such as personal
income tax, corporate tax, etc., Indirect Taxes such as customs duty, excise
duty, etc. The revenue raised by means of these taxes can be utilized in the
development of the country thereby accelerating the rate of economic growth.

2. Reduction in Inequalities of Income

Taxation follows the principle of equity. The direct taxes are progressive in
nature. Also certain indirect taxes, such as taxes on luxury goods are also
progressive in nature. This means the rich class has to bear the higher incidence
of taxes, whereas, the lower income group is either exempted from tax (direct
taxes) or has to pay lower rate of duty (indirect taxes) on goods consumed by
the masses. Thus, taxation helps to reduce inequalities of income and wealth.

3. Social Welfare

Taxation generates social welfare. The social welfare is generated due to certain
undesirable products like alcoholic products, tobacco products and such other
products are heavily taxed, which restricts their consumption, which in turn
facilitates social welfare.

A part of the tax revenue is utilized for social development activities, such as
health, education and family welfare, which also improve social welfare as well
as social order in the society.

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4. Foreign exchange

Taxation encourages exports and restricts imports. Generally, developing

countries and even the developed countries do not impose taxes on export items.
For instance, in India, exports are exempted from excise duty, VAT, customs
duty and other duties.Therefore, taxation helps to earn foreign exchange through
the promotion of exports.

5. Regional Development

Taxation plays an important role in regional development; Tax incentives such

as lower rate of taxes in Special Economic Zones, induces business firms to set
up industries in such regions, Tax revenue collected by government is also
utilised for development of infrastructure in backward regions.

6. Control of Inflation

Taxation can be used as a tool of controlling inflation. Through taxation, the

Government can control inflation as follows :-

1. If inflation is due to high rise in prices of essential items, then the

Government may reduce the rate of indirect taxes.

2. If inflation is due to increase in demand, the Government may try to cut

down the effective demand by increasing the tax rate. Increase in tax rate
may restrict consumption, which may reduce demand, and subsequently
inflation may be controlled.9

9
Information Technology Act 2000, India, available athttp://kalyan-
city.blogspot.com/2010/12/role-of-taxation-in-developing.html (visited on Oct 30, 2018)
12
A fair assessment would conclude that well designed tax policies have the
potential to raise economic growth and overall development of the country. A
well oriented system of taxation requires combination of direct & indirect taxes
in proportion that suits best to the economy of the country. Both direct and
indirect taxes are essential to bring adequate revenue to the state for meeting the
increasing public expenditure. Both taxes are essential to promote economic
growth, fill employment and economic stability.

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 Tax Equity
Taxation equity is the principle that taxes should be fair. Fairness, or equity,
means that everybody should pay a fair share of taxes. Equity or economic
equality is the concept or idea of fairness in economics, particularly in regard to
taxation or welfare economics. Equity is based on the idea of moral equality.

Taxation involves compulsion. Therefore, it is important for the tax system to

be fair. An important question widely discussed in public finance is what kind
of tax system is fair, just or equitable? Equity in taxation is the first canon of
taxation on which Adam Smith laid a good deal of stress. A fair tax system is
not merely an issue in pure economic analysis but also in social philosophy.
There are two prominent theories put forward to devise a fair or equitable tax
system.10 They are:-

(1) Benefits Received Theory and

(2) Ability to pay Theory.

Benefits Received Theory

According to this theory of taxation, citizens should be asked to pay taxes in

proportion to the benefits they receive from the services rendered by the
Government. This theory is based upon the assumption that there is an exchange
relationship or quid pro quo between the tax payer and Government.

The Government confers some benefits on the tax payers by performing various
services or providing them what are called social goods. In exchange for these
benefits individuals pay taxes to the Government. Further, according to this
theory, equity or fairness in taxation demands that an individual should be asked

10
Information Technology Act 2000, India, available
athttp://www.economicsdiscussion.net/taxes/principles-of-taxation-economics/26212 (visited
on Nov 3, 2018)
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to pay a tax in proportion to the benefits he receives from the services rendered
by the Government.

The benefit principle is applicable only in cases where the beneficiaries can be
clearly identified. Thus benefit principle is applied to the collection of road tax
from vehicle owners. This is also applied when local bodies collect special
levies for the services such as construction of sewers and roads they render to
the people of their locality. The benefit principle is also applied to social
security programmes for workers.

Ability to pay Theory

The ability to pay theory requires that individuals should be asked to pay taxes
according to their ability to pay. The rich have greater ability to pay, therefore
they should pay more tax to the Government than the poor.

Essentially, the ability to pay approach to fairness in taxation requires that

burden of tax falling on the various persons should be the same. In this
discussionwe mention about the two concepts of equity, namely horizontal
equity and vertical equity based on the principle of ability to pay.

According to the concept of horizontal equity, equals should be treated

equally, that is, persons with the same ability to pay should be made to bear the
same amount of tax burden. According to the vertical equity, unequals should
be treated unequally, that is, how the tax burden among people with different
abilities to pay is divided.11

11
Information Technology Act 2000, India, available
athttp://www.yourarticlelibrary.com/economics/taxation/the-principle-of-equity-in-taxation-
explained-2/38118 (visited on Nov 3, 2018)

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 Redistribution of Income and Wealth
Income Redistribution is an economic practice which is aimed at leveling the
distribution of wealth or income in a society through a direct or indirect transfer
of income from the rich to the poor. Redistribution of income is the transfer of
income from some individuals to others by means of a social mechanism such
as taxation, charity, welfare, public services etc. The term refers to
redistribution on an economy-wide basis rather than between selected
individuals.

The aim of redistribution of income is to avoid a perilous income situation

which proponent economists describe as unreasonable or extreme
inequality.Income redistribution will lower poverty by reducing inequality, if
done properly. It helps in reducing social tensions arising from inequality and
allowing poor people to devote more resources to human and physical asset
accumulation. Transfers to the poor should not consist merely of cash; they
should also boost people’s capacity to generate income, today and in the future.
Education and training as well as access to health care, micro-credit, water,
energy, and transportation are powerful instruments. Programs such as India’s
Mahatma Gandhi National Rural Employment Guarantee, in which the state
acts as the employer of last resort, help in generating income by poor people
and thereby eradicate up to an extant poverty. Financing these programs through
progressive taxation while providing cash transfer incentives to poor households
thus reduces inequality and poverty in the short term and helps these households
generate more income over the medium and long term.12

12
Information Technology Act 2000, India, available
athttps://www.imf.org/external/pubs/ft/fandd/2018/03/bourguignon.htm (visited on Nov 3,
2018)
16
There are various approaches to income redistribution. Some involves
Governments whiles others involve organizations and individuals.A more
common example or approach to Income Redistribution is the Progressive Tax
system. Many countries, if not all, have adopted the Progressive Tax system
whereby people who earn above certain calibrated amounts of income pay
higher tax rates. This way, the rich end up paying about 5–20% more on their
income than the ordinary or poor citizens pay.13

Wealth redistribution refers to the seizure of assets from the rich in society and
distributing them to other poor members of society.Unlike Wealth
Redistribution, Income Redistribution does not take away the hard earned
properties of people. Income redistribution uses strategic economic policies to
transfer income from the rich to the poor, and it does not involve forceful
acquisition of people’s assets.The distribution of wealth looks at the economic
distribution of ownership of the assets in a society, rather than the current
income of members of that society.

13
Information Technology Act 2000, India, available at
https://www.cleverism.com/lexicon/income-redistribution-definition/ (visited on Nov 3,
2018)
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 Advantages
1. Fairness

Redistribution of Income and Wealth is good because of the human intrinsic

sense of fairness. All of us enter this world totally and equally helpless.
Helpless, dependent babies will not survive without care, and yet they have
done nothing to earn their keep. Yes, parents have the responsibility of caring
for their children, not the rest of us, but most of us would step in, and care for
babies if the parents failed to do so, or did so poorly that the life of the baby
was in danger. There have been many psychological experiments that show that
human beings have some sort of intrinsic sense of fairness, and if the minimum
standard of fairness can't exist any other way, humans have, throughout history,
used some form of fairness established by some sort of economic equality
supported system. Caring for the poor, the damaged, and sick, and the
profoundly unlucky is a compassionate thing to do.

If money is just required, as a sort of charge for living in society, then the
burden of the costs of compassion are less, and the needs are met.

2. Economic Efficiency

Redistribution of Income and Wealth is good because it is good for both the
poor and for the rich. When the population contains huge gross inequalities,
when the rich are real rich and the poor are not only really poor, but also there
in huge numbers, then that governmental society will suffer from economic
inefficiencies. Economic inefficiencies occur when, for example, there are too
many people too poor to buy shoes which make shoe manufacturers suffer. Too
many poor people limit the growth potential of the economy.

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Shoe manufacturers can't make it by making shoes for just the rich, because
there are not enough rich feet. There tend to be fewer rich and a majority poor
and middle class, so if you want to sell goods, it just makes sense to sell stuff to
the majority (the poor and middle class) as well as to rich people.

3. Stability and Peace

Redistribution of Income and Wealth is helps in maintaining stability and peace

in the Society. Often it has been seen that the people who commit crimes does
not do it out of interest, instead they are being forced to do it out of their poor
and stringent circumstances. Poverty is considered to be the paramount reason
of increasing crime rates in the society. Redistribution of Income and wealth
will help provide people with their basic needs and also motivate them to earn
their bread and butter. Thus eradication of poverty will automatically lower the
crime rates in the society and thereby the goal of a stable and peaceful society
will be achieved.

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 Disadvantages
1. Encroachment on Property

Redistribution of Income and Wealth is not considered good because in our

political system of free enterprise/capitalism, private property is sacred,
inviolable, and sacrosanct. Society is based upon a person's right to work, earn,
and keep the fruits of their labor. If I create wealth, then that wealth belongs to
me and no one has the right to take it away from me.

2. Encourages Lethargy

Redistribution of Income and Wealth is coddles the poor, and reinforces the
tendency of most people to be lazy, and happy to live on the dole. Once people
get this idea that no matter what they do or whether they work or not, they will
still be provided with their basic needs by the government, they will stop
working and sit idle because at the end somehow their needs will be fulfilled.
This will make them lethargic and not wanting to work anymore which will
affect the overall growth of the economy.

3. Armed Robbery or Forced Charity

Redistribution of Income and Wealth is sometimes considered to be a kind of

forced charity. It is also sometimes termed as a democratic armed robbery.
Government is an agency of force. If you don't pay your taxes, the government
will impose heavy penalties and might sentence you to the prison. Some anti-tax
zealots believe that if anything can be done voluntary, the voluntarily is the only
way to get it done. The Government wants to take the money against the will of
people who have earned it by their hard-work and perseverance, and give to
those who are voluntarily dependent on them.

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 Conlusion
From the above project, we gathered that growth is an integral part of almost
every system in the country whether it be governed by nature or by human
beings themselves. Economic Growth is nothing but a growth in economy of a
state. A state has to have a constant growth in its economy which will not only
make it stronger but also help it in entering the category of developed
economies.

We learned various ways by which we can foster or hamper the Economic

growth of the country. We discussed in detail the role of Taxation in the
Economic Growth of the country. Taxation is one of the key features in the
economic growth. A state cannot expect to have a steady and continuous
economic growth unless it has a good tax policy affirmed by the citizens of the
country. We also threw light upon Tax-Equity as we all know Taxation involves
compulsion therefore, it is important for a tax system to be fair and reasonable.

In the last segment, we learned about the Redistribution of Income and Wealth
and how it is beneficial as well as adverse to interest of society. Therefore, we
can say that change and development is not only essential for living a healthy
and peaceful life but also for a country to grow and excel in all endeavors.
There are various ways to foster economic growth of a country. A sound
government has to choose ways which are best for the interest of society.

21
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22
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