The Case For A Generous Income Tax Cut In 2025-26 Union Budget

It is probably too late to make any real changes to the Union Budget 2025-26, which will be presented this Saturday (1 February). But if I were the Finance Minister, I would offer a strong dose of income tax cuts for individuals.

My case is both ideological and practical, necessitated by economic trends and shocks likely in the coming fiscal year (2025-26).

Ideologically, I have never been a great fan of personal income tax, and, if at all such a tax must be levied, I would prefer a flat tax of, say, 15 per cent, after a high basic exemption.

Ninety-nine per cent of people should not have to pay any income tax at all. Any income earned by any individual, whether from work or capital investments (dividends, interest, etc), can then be taxed at a flat 15 per cent, which would also remove the special treatment of investment incomes from capital gains.

I believe that the bulk of government spending must be financed by indirect taxes and corporate taxes. An ideal tax would be a tax on expenditure, but since this would be a tough system to administer, the second-best alternative is indirect tax, including customs, excise, and goods and services tax (GST).

Also, when an entire sector — agriculture — pays no income tax at all, indirect taxes on goods and services are the best way to get them to pay for public spending.

Indirect taxes have the advantage of being less visible to the consumer, which is why the Left hates them. They prefer to gouge taxes out of the rich, and they want this to be viscerally visible.

But indirect taxes are a relatively painless way of collecting revenues, because, for the consumer, it is the price that counts, not the in-built taxes. If they cannot afford something, they can choose not to buy it. In the case of income, you will be robbed by the state whether you like it or not.

Coming to the practical side of why a tax cut is needed this year, this is my logic:

One, the economy is slowing down, and hence a small stimulus through a broad-based income tax cut is one way of increasing consumption and consumer spending, especially on discretionary products and services. 

Two, the global environment post the inauguration of Donald Trump may inhibit trade-based economic activity as tariffs could rise. If Trump wants to increase America’s tax revenues through higher tariffs — we don’t know how far he will go in this direction — his tariffs will be countered with retaliatory tariffs, including some by India.

This implies that we need to boost the domestic economy through a stimulus and also fund the tax cuts through higher customs duties on specific products (or entire countries) in ways that are not harmful to our own economy. One can presume that any loss on the income tax revenue side can partly be made up from higher customs or GST hikes. 

Third, if individuals spend more, and this shows up in corporate profits, some of the revenues lost can be recouped from corporations.

Fourth, most sane people resent having to pay high taxes, especially income taxes. Income tax is what makes even honest people dishonest. For example, people avoid GST because they don’t want to show a turnover level at which the income tax people think they are hiding income. A flat tax or even the elimination of income tax for the vast majority of people will make people more ethical than they are now.

If the experiment with tax cutting works, we should carry the idea forward next year and the years after that. Income tax on individual earnings is the worst possible way to bankroll government spending. I hope we start making this shift this year.

The only people who love income tax are people from the Left, who like to wear the moral mantle of Robin Hood. But governments are not Robin Hoods. To buy votes, they become Tax Hoodlums.