Saturday, Dec 20, 2014

No more bandaid tax policy

Perhaps we should call it the Sen (Amartya)-NAC-Piketty policy of taxation. Perhaps we should call it the Sen (Amartya)-NAC-Piketty policy of taxation.
Written by Surjit S Bhalla | Posted: June 7, 2014 1:00 am

There can be many positive side-effects of the Narendra Modi-BJP mandate. The electorate has provided the BJP with a free hand in charting India’s economic and social policies. Some of the structural changes demanded by the electorate will require deft manoeuvring between the Centre and states, or between Lok Sabha and Rajya Sabha. However, the forthcoming budget, that is, the maiden tax and expenditure policy document, is per se only constrained by the imagination, thinking and boldness of PM Modi and Finance Minister Arun Jaitley. They have only two choices in formulating the budget. Either they continue with a little bit of tinkerisation here and a little bit of bandaid there. This is the policy followed by every government of India budget, with only one exception (February 1997) since the breakthrough 1991 budget. Or they decide to chart an intelligent new course in formulating tax and expenditure policies.

Let us start with some no-brainers. Given the state of the economy, tax increases are ruled out; equally, rationalising of expenditures are ruled in so that the net result is that India embarks on a structural fiscal reduction path, a programme that gets India to a Central fiscal deficit of 3 per cent of GDP and a consolidated Centre plus state deficit of around 5.5 per cent of GDP. This will entail a reduction of around 2.5 to 3 per cent of GDP from the present obscene levels. This and the next article will discuss how corporate and personal income taxes can be restructured according to non-bandaid thinking.

Around the Western world, there is heightened concern about rich fat cats increasing their incomes at the expense of everyone else. There was the 99 per cent Wall Street movement and now there is economist Thomas Piketty’s recommendation that there be a super fat cats tax. The jury is still out on increasing tax rates for wealthy individuals and rich corporations in the West. In India, the tax-the-rich recommendation has preceded Piketty by at least five years. Perhaps we should call it the Sen (Amartya)-NAC-Piketty policy of taxation.

In India, corporations are already taxed at the highest effective rate in the world. (An effective tax is simply the ratio of tax paid to income earned. The difference between the stated nominal and the actual effective arises because of legal tax deductions.) And this sock-it-to-the-rich fat cats policy has had predictable effects. High and onerous tax rates have slimmed the Indian corporate sector so much that they are too starved to produce any additional output. Industrial output in India has not increased by even one widget over the last three years. The 2014-15 Indian effective tax rate of 29 per cent is a full 11 percentage points higher than most of our East Asian competitors, and 15 to 20 percentage points higher than competitors continued…

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