Delhi chief minister Sheila Dikshit has learnt a bitter lesson in the interlink between the tax rates and the revenue raised. Believing in the dangerous myth that higher taxes means higher revenues, she raised the value-added tax (VAT) on diesel from 8.5 percent to 20 percent in Delhi in April. She hoped that the higher tax on diesel in the seemingly affluent capital would get more revenue for the Commonwealth Games. Results were disastrous.

There was a massive decrease of 60 to 90 percent in diesel sales in Delhi in just a little over 90 days after this decision. Around 200 petrol pumps started incurring heavy financial losses. Tentative assessments showed most petrol pumps would incur a further heavy loss and might get closed down by the end of September. Also as a result at least 5,000 employees would lose their jobs and more than 25,000 dependent family members would starve until diesel consumers return to the petrol pumps.

The transport vehicles started getting their tanks filled from Haryana, going 10 km across the borders. This can be verified from the Municipal Council of Delhi toll tax barriers. Haryana has a VAT rate on diesel at 8.5 percent. Alarmed at dwindling revenues, Dikshit has brought down the VAT rate of diesel to 12 percent effective from August 20.

It remains to be seen if the consumers will move to Haryana even after August 20 as the neighbouring state's VAT remains still remains lower.

Dixit has just learnt what is known as Laffer Curve in economics textbooks. In simple terms, Laffer Curve implies that lower tax rates change people's economic behavior and stimulate economic growth, which leads to tax revenues exceeding static estimates. Under some circumstances, tax cuts can lead to more (and not less) tax revenues. ON the other hand, the exact opposite occurs with tax rate hikes. The license raj of Indira Gandhi in the 1970s, when the income tax rate was over 90 percent, increased only poverty in India and not the revenue. Today when tax rates have been brought down to 30 percent gradually, tax revenues have gone up with every scale-down.

A few years ago when the Delhi government introduced a regime of low house tax rates the revenue increased manifold. When the import duty on gold was slashed dramatically, the gold smuggling empire of the late underworld don Haji Mastan crumbled like a pack of cards.

The simple axiom in life, anywhere, is to bring tax rates down so low that effort to evade taxes and the money and the time that go in it become a virtually worthless exercise. The same thing will happen if entertainment tax rates were lowered; it will bring more revenue as lower film viewing expenses will bring more viewers to now largely empty cinema halls across India.

The G20 has passed a resolution asking major 28 tax havens around the globe including Switzerland to shut shop or face economic sanctions, the OECD countries including India will succeed in curbing that menace. But India still charges a 30 percent income tax on individuals, as against the effective rate of 19 percent on corporations (11 percent deductions have been inbuilt in taxation rates of companies with dividend untaxable) and humiliating to the common man. Owners of biggest industrial houses in India pay little income tax on personal incomes even as companies they control are adding their names fast to list of billionaires cheating ordinary tax payers.

Unless the income tax rate for individuals is slashed to at least 10-15 percent in India, where there is no or very little social safety network (don’t compare with the Scandinavian countries which has higher personal income tax rates but provide various free services like open heart surgery to funeral expenses, low rate home rents, etc.), it is only a matter of time before new tax havens breed.