ROAD TO RUIN

Road to ruin  
 
 
 
 
 

MURARI SHARMA

COST OF FEDERALISM

Fellow citizens, a horrible rise in taxes will crush you to death if you let your leaders create too many states in the union of Nepal.

My father who is no more with us used to say, “Responsibility without resources to back it up ruins you.” I am afraid new Nepal is taking the road to ruin by creating responsibility in the form of too many states without resources to make them work. 

I support federalism, because it not only helps devolve power to the lower levels of government but also provides for competition among states leading to progress. I am not opposed to anyone’s identity, but I am deeply worried that creating too many weak provinces would make the youngest union on earth financially unviable with lamentable consequences. 

At heart, our leaders know what they are doing is not right, but their priorities are elsewhere. They are more interested in their own opportunities than your identity and capacity to pay. For politicians, more states offer more openings to become governors, chief ministers, ministers, legislators and other political officials. For you, more states mean higher taxes and more regulations, once the euphoria of identity subsides.

At a time when the rest of the world—from India and the United Kingdom to China and Cuba— is cutting taxes, reducing the size of government, and expanding the private sector to prop up growth, Nepal is going in a diametrically opposite direction. 

Federalization of the country will increase taxes, expand the size of government and crowd out the private sector. But these effects can be minimized by creating only a small number of states, which will save the citizens from the unbearable agony of higher taxes that will be inflicted by too many states and too many officials enjoying privileges from them. 

Creating only a small number of states will save the citizens from the unbearable agony of higher taxes.

Citizens, therefore, must rise to protect their own interests. They must prevent politicians from creating too many states so the states become financially viable and economically competitive. 

Financial viability is key to any project, big or small. We look at financing when we buy vegetables, change the carpet, redo the bathroom, set up a school, build a house, or construct a road. It is absurd to leave out the financial viability of such a massive project as is the country’s reorganization. Unfortunately, leaders have converted Nepal into a fools’ paradise over the last half a dozen years. 

Otherwise, how do you explain more than 7,000 martyrs? How do you justify sending petty thieves and small time killers to jail and big dacoits and mass murders to Singh Durbar? How do you rationalize the government pinching pennies on cetamol and saline water for the ordinary sick but sending ministers on lavish foreign trips for minor treatments? 

Only in a fools’ paradise, one would think of creating the 14 states proposed by the Maoists, 8-12 states by the UML, 6-7 states by the Nepali Congress, and 11 states by the State Restructuring Commission, in a poor country with a population of 26 million. Under all these proposals, Nepal will have one of the smallest number of people per province in the world. 

These states will be financially unviable. Here is why. Currently, the state spends 80 percent of its revenue on the salaries, allowances, housing, and other expense of more than 250,000 political officials and government employees, as well as the repayment and servicing of national debt. That leaves only 20 percent of the revenue for development activities, including the local cost component of foreign aided projects. 

The number of political and bureaucratic officials will increase depending on the number of provinces, once they are created. To get a sense of the increase, let us look at the ratio between federal employees and state plus local employees in India, the US, and the UK, which is about 1:3.4, 1:1.4 and 1:1 respectively. India has 28 and the US 50 states with state governments and the UK four states but only three governments. 

If Nepal creates four states and maintains the 1:1 employees ratio like the UK, the number of political officials and bureaucrats in states would be around 250,000. Add to this the federal officials, and the number crosses 500,000. The regular expenses will double. Each additional state will require 30,000-40,000 extra state and local officials. Development activities will require additional resources.

Where will these resources come from? Your leaders who want to create many states to respect your identity will come back to impose higher rates of the existing taxes and new taxes on you. You will have to pay those taxes through your nose. Otherwise, your leaders would not hesitate to send you to jail. 

Let me cite the example of the UK to give a sense of how many, and how high, taxes you might have to pay. 

The UK federal government charges up to 50 percent tax on income; no matter how much money you make, you must pay about 30 percent in payroll taxes and national insurance deductions; corporate taxes go up to 42.5 percent; value added tax (sales tax) is 20 percent; and out of £1.35 per liter price of petrol, the government collects 94 pence. There are substantial import duties as well. All this makes products and services 50 percent more expensive in the UK than in the US. 

On top of that, local governments charge £1,600 (with some councils charging up to £2,400) a year in taxes for a three-bedroom house or apartment. Driving on a bus-lane once costs £130 in penalty and parking without a permit once or after the expiry of paid-for time costs you £120 in penalty. Transfer of big property attracts up to 50 percent of its value in government taxes. 

British people have tolerated high taxes because they also get much in return in public services and benefits. 

But would you accept, say, three times increase in land revenue in Nepal? Doubled income tax? Twenty percent sales tax? Rs.5,000 a month in housing tax for your three-bedroom residence? Or reduction by half the threshold for tax-exempt income? 

If the taxes are not increased, the government will have to beg for foreign aid or borrow. Wealthy countries are curtailing their assistance due to economic difficulties. Nepal cannot borrow from the international markets due to its bad credit rating. So the federal and state governments will have to squeeze every penny possible from their citizens. 

What is more, citizens in rich states will be angry to pay higher taxes to subsidize the poor states. Like Scotland in the UK, which is contemplating independence because it believes it is giving too much to London and receiving too little in return, richer states in Nepal would want to secede rather than subsidize poorer states.

So fellow citizens, think of consequences before you let your leaders create too many states to advance their selfish interests and to impose a horrible tax burden on you. States without resources to meet their responsibility are a road to ruin. I will be happy if proved wrong.

http://www.myrepublica.com/portal/index.php?action=news_details&news_id=32455

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