Mumbai has suffered the biggest drop in tax collections in a year. The city’s tax collections were down 13.9% from the previous year. While personal income tax revenue declined by over 10%, corporate tax collections fell by over 10%. The numbers are in line with economists’ expectations and sequential improvement is essential given the fragile momentum of the economy. The government has made up for the lost revenue by offering higher tax rates. Despite these challenges, the collection figures are still encouraging.
While the country’s total tax collection fell in the past year, it remained higher than a decade ago. The biggest drop came in the city of Mumbai, which contributed over a third of the country’s total tax collections. Despite the decline in revenue from taxation, the city continues to make the country proud. However, it is important to note that the city is a far cry from the tumultuous period of recent years.
The total tax collections in fiscal 2020 were down a total of 4.3% from July to June. After accounting for inflation, that figure is down to just 5.6%. This year, 43 states reported tax revenue shortfalls, with California, New York, and Texas recording more than half of the overall shortfall in inflation-adjusted dollars. The total drop was largely driven by personal income tax revenue, which accounted for two-thirds of the shortfall.
In many developing countries, personal income taxes make up a very small share of total tax revenue. This is partly due to the ease of investment in the developed world. Developing countries face a difficult task in taxing personal income, and some countries in Latin America have stopped taxing financial income altogether. During the 1980s, Vito Tanzi, Ph.D., served as Director of the IMF’s Fiscal Affairs Department from 1981 to 2000. He is the author of several books and has published numerous articles in professional journals.
The decline in individual income tax revenue was partly offset by higher corporate tax receipts. The government estimates that corporate income tax receipts will increase by 6 percent this year, driven by higher profits and increased wages. But while corporate tax payments grew faster than expected, they will still fall short of the pre-tax cut estimates for the next decade. This is not entirely surprising, considering that the CBO’s forecast for tax revenue in 2020 predicts an overall decline of 6.6 percent over the next decade.
While property taxes and payroll taxes make up the bulk of state and local tax collections, the issue of tangible personal property taxes is problematic. These taxes are levied on tangible personal property, such as business equipment, machinery, inventory, furniture, and automobiles. Although these taxes make up a small percentage of total tax collections, their complex structure distorts investment decisions. The bottom line is that state tax revenue is not enough. This situation can only lead to further tax hikes and cuts.