Taxes: The Price of Civilization (and Who Avoids Paying)
The road from Ravi's house to his school is about two kilometers long. It is a paved road, with a thin layer of asphalt over a bed of gravel, with a drainage channel on one side that mostly works during the monsoon. There are streetlights — three of them function. A painted crosswalk marks where the road intersects the highway, though the paint is fading. A traffic policeman stands at the crossing during school hours, blowing his whistle with the weary authority of a man who knows that half the autorickshaws will ignore him.
Ravi does not think about any of this. He walks to school. The road is simply there.
But someone paid for that road. Someone paid for the asphalt, the gravel, the drainage channel, the streetlights, the paint for the crosswalk, and the salary of the traffic policeman. Someone paid for the school building, the desks, the blackboards, the textbooks that Ravi receives free of charge. Someone paid for the teachers — imperfectly, inadequately, often late — but paid.
That someone is you. And your parents. And your neighbors. And every person in this country who pays taxes.
This chapter is about taxes — what they are, why they exist, who pays them, who avoids them, and why the way a country taxes its people reveals more about its values than any speech or manifesto ever could.
Look Around You
Make a list of ten things you used today that were paid for, at least in part, by the government. The road you walked on. The water that came from your tap. The electricity in your school (if it is a government school). The traffic signals. The bus you might have taken. The park you passed. The hospital your grandmother visited last month. The police station in your neighborhood. The air quality monitoring station. The satellite that enables your weather forecast. Ten is easy. Twenty is easier. Fifty is possible. Almost nothing in modern life is untouched by public spending, and public spending comes from taxes.
What Are Taxes, Really?
Strip away the complexity, and taxes are simple. They are the money that citizens pay to the government so that the government can provide things that individuals cannot provide for themselves.
You cannot build a highway by yourself. You cannot maintain an army by yourself. You cannot run a court system, train doctors, launch weather satellites, or maintain a national disease surveillance network by yourself. These things require collective action — everyone contributing a share, so that everyone benefits from the result.
Taxes are the mechanism of that contribution.
This is not a modern invention. Taxes are as old as civilization itself. The ancient Egyptians taxed grain harvests to build pyramids and maintain irrigation systems. The Maurya Empire under Chandragupta collected taxes on agriculture, trade, and mining — Kautilya's Arthashastra, written around 300 BCE, contains detailed guidelines on tax collection, rates, and administration. The Roman Empire taxed provinces to fund roads, aqueducts, and legions. Every civilization that has ever existed has taxed its people, because every civilization has needed to fund things that no individual would fund alone.
"Taxes are what we pay for civilized society." — Oliver Wendell Holmes Jr., United States Supreme Court Justice
This quote is carved into the facade of the IRS building in Washington, D.C. It captures a truth that is both profound and easy to forget: the civilization you enjoy — the roads, the schools, the courts, the defense, the public health systems — exists because people pooled their resources through taxation. Without taxes, there is no state. Without the state, there is no civilization as we know it. There are only individuals and clans, fending for themselves.
The Many Faces of Tax
Not all taxes are the same. They come in many forms, each with different logic, different effects, and different consequences for who bears the burden.
Income tax is levied on what you earn. In India, if you earn below a certain threshold (around Rs 3 lakh as of 2025, though this changes with budgets), you pay nothing. Above that, you pay increasing percentages as your income rises — 5 percent, then 10, then 15, then 20, then 30 percent on the highest slabs. This is a progressive tax: the more you earn, the higher the rate you pay. The logic is simple — those who earn more can afford to contribute more.
Goods and Services Tax (GST), India's version of a consumption tax, is levied on what you buy. Every time you purchase something — a packet of biscuits, a restaurant meal, a mobile phone — a percentage of the price goes to the government. GST rates in India range from 0 percent (for essentials like unpackaged food grains) to 28 percent (for luxury goods and items deemed harmful, like tobacco). This is a regressive tax in practice, even though it looks flat: a poor family that spends 80 percent of its income on goods and services effectively pays GST on 80 percent of its income, while a rich family that spends only 40 percent of its income (and saves or invests the rest) pays GST on only 40 percent.
Property tax is levied on land and buildings you own. Your municipal corporation collects it to fund local services — roads, drainage, streetlights, garbage collection. It is relatively hard to evade, because property cannot be hidden or moved abroad.
Corporate tax is levied on the profits of companies. In India, the rate varies but is generally around 25 percent for most companies, with lower rates for new manufacturing firms. This tax is the subject of intense global competition — countries lower their corporate tax rates to attract businesses, creating a "race to the bottom" that we will discuss shortly.
Customs duties are taxes on goods entering the country. They serve two purposes: raising revenue and protecting domestic industries from foreign competition. When India places a customs duty on imported electronics, it makes foreign goods more expensive relative to Indian-made alternatives.
Excise duties and sin taxes are levied on specific goods, usually those the government wants to discourage — alcohol, tobacco, fuel. The very high taxes on petrol and diesel in India are primarily excise duties, and they raise enormous revenue precisely because demand for fuel is hard to reduce.
WHERE YOUR TAX RUPEE GOES
(India, Central Government, approximate 2024-25)
Of every Rs 100 the government collects:
┌────────────────────────────────────────────────────────────┐
│ INCOME TAX Rs 30 ██████████████████████████████ │
│ GST (Central share) Rs 25 █████████████████████████ │
│ CORPORATE TAX Rs 22 ██████████████████████ │
│ EXCISE DUTIES Rs 10 ██████████ │
│ CUSTOMS DUTIES Rs 8 ████████ │
│ OTHER Rs 5 █████ │
└────────────────────────────────────────────────────────────┘
And of every Rs 100 the government SPENDS:
┌────────────────────────────────────────────────────────────┐
│ INTEREST PAYMENTS Rs 20 ████████████████████ │
│ DEFENCE Rs 13 █████████████ │
│ SUBSIDIES Rs 12 ████████████ │
│ STATES' SHARE Rs 11 ███████████ │
│ PENSIONS Rs 9 █████████ │
│ RURAL DEVELOPMENT Rs 7 ███████ │
│ EDUCATION Rs 6 ██████ │
│ HEALTH Rs 5 █████ │
│ INFRASTRUCTURE Rs 8 ████████ │
│ OTHER Rs 9 █████████ │
└────────────────────────────────────────────────────────────┘
Note: The government spends MORE than it collects.
The difference is the FISCAL DEFICIT — filled by borrowing.
Think About It
Look at the spending breakdown above. The government spends more on interest payments — paying back old debts — than it does on education and health combined. What does this tell you about the cost of past borrowing? What does it mean for today's children and tomorrow's patients?
Progressive vs. Regressive: Who Really Pays?
The distinction between progressive and regressive taxation is one of the most important in all of economics, and one of the least understood.
A progressive tax takes a larger percentage from those who earn more. Income tax is the classic example. Someone earning Rs 20 lakh a year pays a higher percentage of their income in tax than someone earning Rs 5 lakh. The logic is both practical — the wealthy can afford to pay more — and moral: those who have benefited most from the system should contribute most to maintaining it.
A regressive tax takes a larger percentage from those who earn less, even if the absolute amount is the same for everyone. A flat tax on salt, for instance — say Rs 2 per kilogram — would be trivial for a wealthy family but could be significant for a family earning Rs 5,000 a month. The famous Salt Tax imposed by the British on India was regressive precisely in this way: everyone needed salt, so the tax fell hardest on the poorest. Gandhi's Salt March of 1930 was not just a symbolic act of defiance. It was a protest against a regressive tax that crushed the poor.
Most real tax systems are a mixture of both. India's income tax is progressive. India's GST is somewhat regressive, despite attempts to make it less so by exempting essentials and taxing luxuries at higher rates. The net effect — whether the overall tax system is progressive or regressive — depends on the balance between different types of taxes.
Here is the uncomfortable truth: in India, and in most developing countries, indirect taxes (GST, excise, customs) generate more revenue than direct taxes (income tax, corporate tax). This means that the overall tax system is less progressive than it appears. The person buying cooking oil and soap — paying GST on every purchase — may effectively pay a higher percentage of their income in taxes than the wealthy professional who invests most of their income in stocks and real estate, where taxes are lower or easier to defer.
"In this world nothing is certain except death and taxes." — Benjamin Franklin
What Franklin did not say is that death treats everyone equally, while taxes do not.
The Great Escape: How the Rich Avoid Paying
Let us be clear about two distinct things.
Tax evasion is illegal. It means not paying taxes you owe — hiding income, not filing returns, keeping undeclared cash. In India, the "black economy" — economic activity that is hidden from the tax authorities — has been estimated at anywhere from 20 to 60 percent of official GDP, depending on who is doing the estimating and what is being measured. When a landlord collects rent in cash and does not report it, when a doctor charges patients and does not issue receipts, when a business maintains two sets of books — one real, one for the tax inspector — this is tax evasion. It is a crime, even though it is so widespread that many people no longer think of it that way.
Tax avoidance is legal. It means structuring your financial affairs to minimize taxes within the law. And this is where the truly staggering numbers begin.
When Apple, the world's most valuable company, routes its profits through a subsidiary in Ireland, then through another subsidiary in the Netherlands, and then to a holding company in Bermuda — where the corporate tax rate is zero — it is not breaking any law. It is using a structure specifically designed to exploit differences in tax codes between countries. The result: Apple paid an effective tax rate on its international profits that was, at times, less than 1 percent. Not one percent of revenue. One percent of profits. A fruit seller in Mumbai pays more, proportionally, than one of the most profitable companies in human history.
When wealthy Indians move money through shell companies in Mauritius — taking advantage of the India-Mauritius tax treaty that exempted capital gains from taxation — they are engaging in legal tax avoidance. When they buy property through complex trust structures that obscure ownership, or when they donate to political parties to receive tax deductions while gaining political influence, they are playing within the rules. But the rules were, in many cases, written to benefit them.
What Actually Happened
In April 2016, the International Consortium of Investigative Journalists published the Panama Papers — 11.5 million leaked documents from Mossack Fonseca, a Panamanian law firm that specialized in creating offshore shell companies. The papers revealed that hundreds of politicians, celebrities, business leaders, and criminals from around the world had used offshore structures to hide wealth and avoid taxes. Over 500 Indians were named, including prominent business families and public figures. The total amount of wealth hidden in offshore tax havens globally has been estimated by economist Gabriel Zucman at approximately $7.6 trillion — equivalent to roughly 8 percent of global household financial wealth. This is wealth that generates income on which taxes are not paid, costing governments around the world hundreds of billions of dollars annually in lost revenue — money that could fund schools, hospitals, and infrastructure.
India's Tax Problem: Too Few Pay Too Little
India has a peculiar tax profile among major economies. Its tax-to-GDP ratio — the total tax collected as a percentage of the economy's output — has hovered around 17 to 18 percent. Compare this to Scandinavian countries like Denmark and Sweden, which collect 40 to 45 percent of GDP in taxes. France collects about 45 percent. The United Kingdom collects about 33 percent. Even Brazil, another large developing country, collects about 33 percent.
Why does India collect so little?
The reasons are structural and deep.
A large informal economy. Over 80 percent of India's workforce is in the informal sector — street vendors, daily-wage laborers, small farmers, domestic workers — where incomes are low, unpredictable, and almost impossible to tax. You cannot levy income tax on a woman who earns Rs 200 a day doing construction work and has no bank account, no pay slip, and no employer who files returns.
Agricultural income is exempt. Under Indian tax law, income from agriculture is not taxed by the central government. This was intended to protect small farmers, who form the majority of India's population. But it has been exploited by wealthy landowners and by individuals who disguise non-agricultural income as farm income. A real estate developer who buys farmland, shows income as "agricultural," and pays no tax is not a struggling farmer.
A narrow tax base. Despite a population of over 1.4 billion, only about 7 to 8 million Indians pay any significant amount of income tax. Let that number sink in. In a country of 1.4 billion, fewer than 10 million people contribute meaningfully to income tax revenue. The rest are either below the threshold, in the informal sector, or evading taxes.
Weak enforcement. India's tax administration, despite improvements, remains understaffed and overburdened. The ratio of tax officers to taxpayers is far lower than in developed countries. Corruption within the tax system itself — tax inspectors accepting bribes to overlook underpayment — further reduces collections.
TAX-TO-GDP RATIO: HOW INDIA COMPARES
Denmark ████████████████████████████████████████████ 46%
France ████████████████████████████████████████████ 45%
Sweden ███████████████████████████████████████████ 43%
Germany ████████████████████████████████████████ 39%
UK █████████████████████████████████ 33%
Brazil █████████████████████████████████ 33%
South Africa██████████████████████████ 26%
USA █████████████████████████ 25%
China ██████████████████████ 22%
INDIA █████████████████ 17%
Bangladesh ████████ 8%
Nigeria ████████ 8%
Higher is not automatically "better" — what matters is
what you GET for your taxes. But very low collection means
the government cannot fund basic services.
The consequence of India's low tax-to-GDP ratio is visible everywhere. Underfunded schools where one teacher handles five classes. Government hospitals where patients sleep on floors. Roads that collapse after one monsoon. Courts where cases take decades. Police stations without enough vehicles. India's public services are chronically starved of money, and the root cause is that the country does not collect enough tax.
How the British Taxed India
The irony of India's modern tax struggles is that India was, for nearly two centuries, one of the most heavily taxed regions on earth — it was just that the taxes flowed out of the country, not into its development.
The British colonial tax system was designed with one overriding purpose: extracting wealth from India and sending it to Britain. The mechanisms were varied and creative.
Land revenue was the biggest source. The British imposed fixed cash payments on farmers, regardless of harvest quality. The Permanent Settlement of 1793 in Bengal set land revenue demands in perpetuity, creating a class of tax-collecting landlords (zamindars) who squeezed peasants to meet the government's demands. In the Ryotwari system in southern and western India, individual farmers owed taxes directly to the British, with similar results — if the harvest failed, the tax did not.
Salt tax monopolized the production and sale of salt, a basic necessity, and taxed it heavily. The poor, who could afford least, paid the most as a proportion of their income.
Opium revenue came from the East India Company's monopoly on opium production in India, which was then sold to China — a system that combined drug trafficking with tax collection.
Home charges were the most insidious: India was charged for the costs of its own colonization. The salaries of British administrators, the pensions of retired colonial officers, the cost of wars fought in Britain's interest — all were charged to the Indian treasury. This "drain of wealth," estimated by Indian economist Dadabhai Naoroji in the 1870s and later quantified by historian Utsa Patnaik at approximately $45 trillion in modern terms, was the greatest transfer of wealth in human history.
"They taxed our salt. They taxed our cloth. They taxed our land. And they spent the money on themselves. That is not a tax system. That is organized plunder." — Dadabhai Naoroji, in "Poverty and Un-British Rule in India," 1901
The lesson is uncomfortable but important: taxation is not inherently good or bad. What matters is who designs the system, who pays, and who benefits. The British tax system in India was efficient — it collected enormous revenues with remarkable regularity. But it served colonial extraction, not Indian development. The roads and railways the British built were designed to move goods from India's interior to its ports, for export. The schools they built trained clerks to administer the empire. The taxes funded Britain's wars and Britain's prosperity.
A tax system designed to serve the people it taxes looks very different from a tax system designed to serve a foreign power. This is a distinction worth remembering.
Think About It
Why might a country with a 17 percent tax-to-GDP ratio not be able to simply raise tax rates to 35 percent? What practical obstacles stand in the way? Consider: the size of the informal economy, the political power of those who benefit from low taxes, the capacity of the tax administration, and the risk that higher rates might push more activity underground.
Tax Havens: Where Money Goes to Hide
There are places on this earth whose primary economic function is to help wealthy individuals and corporations avoid paying taxes in their home countries. These are tax havens — jurisdictions that offer extremely low or zero tax rates, strict financial secrecy, and minimal regulatory requirements.
The list is both familiar and surprising. The Cayman Islands, the British Virgin Islands, Bermuda, Luxembourg, Switzerland, Ireland, Singapore, Panama, Mauritius, the Channel Islands — these tiny or small territories host trillions of dollars in assets that generate little or no tax revenue for the countries where the wealth was actually created.
The mechanism is straightforward. A corporation based in, say, India earns profits from selling goods to Indian consumers, using Indian infrastructure, employing Indian workers, and benefiting from the Indian legal system. But instead of reporting those profits in India and paying Indian corporate tax, it uses transfer pricing — selling goods or services to its own subsidiary in a tax haven at artificially low prices, so that the profits appear in the haven rather than in India.
An individual does something similar: they move money to a trust or company in a tax haven, where it earns interest, dividends, or capital gains that are taxed at near-zero rates. The money may eventually return to India as "foreign investment," receiving favorable tax treatment — a round trip that converts taxable domestic income into tax-free foreign capital.
The scale is staggering. The Tax Justice Network estimates that between $21 trillion and $32 trillion in financial assets are held offshore globally. The lost tax revenue — money that should have funded schools, hospitals, and infrastructure in the countries where it was earned — is estimated at $427 billion per year.
This is not a victimless arrangement. When a multinational corporation avoids taxes in India, the government either cuts services or raises taxes on those who cannot avoid them — ordinary workers and consumers. Tax havens are, in effect, a mechanism by which the wealthy shift their tax burden onto the poor.
"Tax havens don't just happen. They are created and maintained by some of the world's most powerful nations — often by the very countries that publicly deplore them." — Nicholas Shaxson, Treasure Islands
The Global Race to the Bottom
Something perverse has been happening in global tax policy over the past four decades. Countries have been competing with each other to offer lower corporate tax rates, hoping to attract foreign investment. Ireland cut its rate to 12.5 percent and attracted technology giants. Singapore offered even lower effective rates. The result has been a downward spiral.
In 1980, the average corporate tax rate across major economies was about 40 percent. By 2020, it had fallen to about 23 percent. Some countries — the Cayman Islands, Bermuda, the British Virgin Islands — charge zero.
This is a collective action problem. Each country, acting individually, has an incentive to cut its rate to attract investment. But when every country cuts, no country gains an advantage, and all of them collect less revenue. It is a race to the bottom where the only winners are the corporations that play countries against each other.
In 2021, 136 countries agreed, through the OECD, to a global minimum corporate tax rate of 15 percent. This was historic — the first time the world had attempted to put a floor under the tax competition. But 15 percent is still far below what most countries need to fund their public services, and implementation has been slow and contested.
What Actually Happened
India's relationship with Mauritius illustrates the tax haven problem perfectly. For decades, more foreign direct investment (FDI) flowed into India from Mauritius than from any other country — a tiny island nation of 1.3 million people was supposedly the biggest foreign investor in the world's fifth-largest economy. The reason was the India-Mauritius Double Taxation Avoidance Agreement (DTAA), which exempted capital gains from tax when routed through Mauritius. In practice, Indian and global investors would set up shell companies in Mauritius, route their investments through them, and avoid Indian capital gains tax entirely. The arrangement was reformed in 2016 and further tightened in 2024, but for decades, it cost India billions in lost revenue. The money was not coming from Mauritius. It was Indian and global money, wearing a Mauritius mask.
The Moral Question
Underlying every debate about taxes is a moral question that most economists prefer to avoid: what do we owe each other?
If you believe that every person's wealth is entirely their own creation — the product of their talent, hard work, and good decisions, owing nothing to the society in which they live — then taxes are theft. The government is taking what is yours. This is the libertarian position, and it has passionate adherents.
But is it true? Did the wealthy entrepreneur create their wealth alone? Or did they create it using roads paid for by taxpayers, employing workers educated in public schools, protected by publicly funded police and courts, using infrastructure built by public investment, in a society held together by public institutions?
Warren Buffett, one of the richest men in history, put it simply: "I happen to work in a market system that happens to reward what I do very well — disproportionately. I just got the right DNA and was born in the right country at the right time." He famously noted that his secretary paid a higher effective tax rate than he did, because most of his income came from capital gains, which are taxed at lower rates than wages.
The economist Mariana Mazzucato has documented how many of the most successful private innovations were built on publicly funded research. The internet was created by the US military's DARPA. Touchscreen technology was developed with public research grants. GPS was built by the US government. The basic research behind Google's search algorithm was funded by the National Science Foundation. The companies that commercialized these innovations made billions — and their founders argue that they owe nothing special to the public that funded the underlying research.
"There is nobody in this country who got rich on their own. Nobody. You built a factory? Good for you. But you moved your goods on roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe because of police and fire forces the rest of us paid for." — Elizabeth Warren
This is not an argument for punitive taxation. It is an argument for honest accounting. The wealth created in any economy is a joint product of individual effort and collective investment. Taxes are how the collective investment is sustained. When the wealthy avoid taxes, they are free-riding on everyone else's contributions — using the roads, courts, and educated workers that others paid for, while contributing less than their share.
The Bigger Picture
We started with Ravi walking to school on a road he takes for granted. We traced the money that built that road — through income taxes, GST, corporate taxes, customs duties — and asked who pays and who avoids paying. We traveled from ancient Egypt's grain taxes to Kautilya's Arthashastra, from the British salt tax that Gandhi marched against to the Panama Papers that exposed the global system of legal tax avoidance.
What have we learned?
First, that taxes are the price of civilization. Every public good you enjoy — roads, schools, defense, courts, clean water, disease surveillance, weather forecasts — is paid for by taxes. There is no other way. No society in history has maintained these things without collective contributions.
Second, that not all taxes are equal. Progressive taxes ask more of those who have more. Regressive taxes burden the poor disproportionately. The design of a tax system reveals a society's deepest values — who it protects, who it burdens, and who it lets off the hook.
Third, that the gap between what countries could collect and what they do collect is enormous — and that gap is not accidental. It is the result of political choices, lobbying, tax havens, weak enforcement, and a global system that allows the wealthy to move their money to wherever taxes are lowest. The money that goes missing is the money that should have built Ravi's road, funded his school, equipped his hospital.
Fourth, that India's specific challenge is both structural and political. A huge informal economy, agricultural income exemptions, a narrow tax base, and weak enforcement combine to produce a tax-to-GDP ratio far below what the country needs to fund its development. Solving this is not just a technical problem. It requires political will — the willingness to tax the powerful, close loopholes, and build institutions capable of collecting what is owed.
And finally, that the moral question underneath all of this — what do we owe each other? — has no single correct answer. But pretending the question doesn't exist, as much of economics does, is an abdication of responsibility. A society that allows some to enjoy the benefits of collective investment while contributing nothing to it is not a free society. It is a society where the rules are rigged.
Oliver Wendell Holmes was right. Taxes are the price of civilization. The question is whether everyone is paying their fair share — and the honest answer, in almost every country on earth, is: not yet.
"The tax collector's job is to pluck the maximum feathers from the goose with the minimum hissing." — Jean-Baptiste Colbert, Finance Minister to Louis XIV of France
The trouble, in our time, is that the biggest geese have learned to fly to places where no one plucks at all.