Revisit fiscal paradoxes

EXTENDED CORPORATE WELFARISM IS THE ANTITHESIS OF EFFICIENCY

- MS SAHOO CKG NAIR

THE RECENT HEADLINES about government support for Vodafone Idea highlights an enduring fiscal paradox— public money is routinely used to prop up inefficiency. This is nota one-off event. Over the years, governments have repeatedly stepped in, offering bailouts and relief packages to struggling companies and even entire industries using taxpayers’ resources in the name of protecting jobs, investors, or systemic stability. While well-intentioned, such interventions often keep inefficient and even unviable businesses afloat, undermining market discipline and sidestepping robust stress-resolution frameworks like the Insolvency and Bankruptcy Code.

Consider two firms, A (efficient) and B (inefficient), each deploying resources worth %100 to produce the same product. Firm A produces 100 units, while firm B produces 80. If A seeks a profit of $20, it would sell its units at 1.20 each to earn a total revenue of $120. At this market price, B earns only %96, incurring a loss of %4, and should exit the market, allowing resources to flow to more efficient uses. Thus, market logic rewards efficiency and weeds out waste.

Now, introduce taxation. Suppose A pays 20% tax on profits. To maintain its post-tax return, it raises its price to 1.25 per unit, earning $125 in total. At this higher price, B earns 100, breaks even, and survives without paying any tax. The tax on efficiency effectively shelters inefficiency. Scarce resources remain trapped in unproductive use and the market’s natural corrective mechanism is blunted.