Why government should tax less and work more

One of the key challenges before companies is to figure out what business they are really in. Once this is clear, everything else -- strategy, etc -- follows. If you know what you want to be, you know what to do.

Xerox Corp thought it was in the business of selling copiers. You had to hardsell the product, and convince the customer why he should invest money in expensive machines. But when the management probed a little deeper, it found that the customer's real need was making copies; owning a copier was incidental to the process. The change in the company's self-definition yielded significant benefits to both the company and its customers.

Governments, like companies, need to be clear about what business they are in. They do lots of things they shouldn't be doing, and don't do the things they should be. Most governments define their jobs as defending the country from external aggression, maintaining internal law and order, promoting economic and social development and ensuring a fair distribution of the fruits of growth.

But look closer: are these responsibilities that need to be done within government or should government merely be ensuring that someone does the job? When governments try to do too much, the net result is bureaucracy, waste, corruption and lack of accountability.

A sensible government should, therefore, try to get things done rather than do everything itself. If governments are to define their businesses like Xerox did, we can restate the job definition thus: creating an enabling environment in which citizens and corporations can help themselves prosper economically and socially. Jobs don't have to be created in state-run institutions; we merely need a policy in which jobs can grow everywhere. Schools do not have to be run by municipalities. They should be set up and run by those who can run them best.

To raise literacy and provide efficient healthcare, you don't need the deadening hand of government. The best educational and healthcare institutions are not government-run. Visit any municipal school or hospital and contrast their performance with convent schools, institutions run by the Ramakrishna Mission, the Ekal Vidyalayas or the Aravind Eye Hospitals and you will appreciate the difference. In the former, public money goes down the drain; in the latter, private money (with some government assistance) works wonders.

Aravind has a world record in eyecare. In just one year between April, 2007, and March, 2008, it offered outpatient services to 2.4 million people, and operated on 2,85,000 patients -- and all this from just five centres in Tamil Nadu and Puducherry. Imagine what can be achieved if there is an Aravind in every state.

If we need better healthcare, it follows that government's role must be to facilitate better investments in this sphere. It should enter healthcare directly only if no one else is willing to do so. If any sensible NGO or private organisation can provide better healthcare and education, why should government be raising revenues for these purposes? Isn't it simpler to let resources flow directly to the organisations doing the good work?
This brings us the crux of the argument: if the government's job is to facilitate the allocation of resources, shouldn't our tax structure reflect this? Defining the government's job more precisely enables us to say that
it does not have to raise resources itself (i.e. tax us) to fund social sector projects. One way to do this would be to offer tax rebates for any organisation that channels money to critical areas like health or schools.
Look what happens now. Government collects taxes from companies and individuals, allocates these funds to various ministries. After feeding babus and financing corruption, the balance reaches schools and hospitals. Being government-run, the cycle of corruption and waste continues in government-run schools and hospitals. Putting money in the hands of government is the worst way to spend on a socially desirable project.
We can cut this cycle of waste by making resources directly available to organisations that venture into social sectors. Any bonafide organisation willing to run a hospital on the basis of government norms --- free treatment, etc --- should be given a tax rebate to the extent of its spending. If I am Dr Reddy's Labs and I am supporting municipal schools in Andhra Pradesh to upgrade themselves, this is currently being funded through a charity foundation.
Instead, if this can be done directly from corporate resources, the company would save on taxes to the extent it channels them directly to social purposes.
It would pay less tax, and would also be able to serve society directly. Dr Reddy's would still need a subsidiary for conducting work in the social sector. This would facilitate the auditing of its books both socially and by accountants. The government need not collect resources and waste them.
We can all be happy that money paid as taxes will not disappear into a black hole called government.