European Rich Wish to Pay more Taxes; What about the Indian Rich

European Rich Wish to Pay more Taxes; What about the Indian Rich

Arun Kumar

CESP, SSS, JNU

Published in The Hindu, September 7, 2011.

Startling news, the rich in many European nations have asked their governments to tax them more. This follows the call by Warren Buffet in the US that the rich should pay more taxes. The motive is self interest - to save their economies from sliding further, going into a double dip recession and preventing the kind of youth violence witnessed in many countries in Europe. The recession looming on the horizon (if we are not already in it) will be more difficult to deal with since this time the cause is political rather than financial, as the case was with the global recession that started in late 2007.

In 2007-08 the experts and the analysts were `behind the curve’ and in a state of denial about the start of the recession. The IMF did not acknowledge the recession till late 2008; almost a year after it had started. Mr. Ben Bernanke, heading the Federal Reserve of the US only admitted problems in February 2008 when the first stimulus of $ 160 billion was announced. The US Treasury secretary did not admit of basic problems in the financial sector even in July 2008 when Freddie Mac and Fannie Mae faced imminent collapse.

By the time Lehaman Brothers collapsed and AIG was on the verge of collapse in September 2008, things had gone out of control. The situation could not be salvaged even with the announcement by the US government of a bail out package of $750 billion. $ 350 billion was pumped into AIG alone to keep it afloat.

Globally, an unprecedented amount of liquidity was released by the Central banks. In normal times that would have led to hyper inflation but in 2008, there was a fear of deflation. The problem had originated with the sub-prime crisis in the housing mortgage market and that spread like a contagion to all financial institutions due to the inter-locked balance sheets.

There was a crisis of trust. The financial system had got linked to the shadow banking which was highly leveraged and unstable. It meant that even a small decline in the prices of the assets of a company led to a big fall in profits and valuation. With the accounting practice of `marked to market’, these losses came on to the balance sheet and the company was in danger of losing its entire capital. Thus, as the stock markets and other markets collapsed, most financial sector companies lost their capital and with that their viability. The governments had to step in and bail out these companies.

In the financial markets where borrowing and lending is the name of the game, with trust evaporating, since it was not clear which company would go under next, none could be trusted and lending ceased. Entities that were considered to be `too big to fail’ were failing one by one – Bear Stern, Freddie Mac, Fannie Mae, Lehman Brothers, AIG, Citibank and so on. No amount of liquidity was enough to revive the financial markets until the situation stabilized with the stoppage of the practice of `marked to market’. There was fraud with the major financial entities not telling the entire truth to their customers about the product they were selling them. The US government has just launched investigations into this fraud.

Globally, governments boosted demand following the Keynesian device of creating deficits. The US budget deficit went from 3% of GDP to 12%. The same happened in India. China provided a $600 billion boost to infrastructure. Japan and much of Europe went in for budget deficits to boost the demand in their economies. Nonetheless, unemployment rose sharply everywhere. In the US, it reached the level of 9.6%. In India, exports which were growing at 35% stated plummeting at 35% leading to large scale unemployment in labour intensive sectors like, textiles, gems and jewelry and leather goods. Many industries and services like, transportation, finance and real estate went into a tail spin.

ILO estimated that 60 million jobs were lost in spite of the attempts by various governments to boost their economies. The workers and the poor bore the brunt. Not that the dollar billionaires did not lose as their wealth declined sharply but they had the cushion of their hundreds of millions and billions of assets still in tact.

The reason for the anemic recovery was that the stimulus was no where as big as was needed to boost employment and revive the economies strongly. So, when the big economies started climbing out of the recession in early 2010, employment hardly rose in the major economies.

Politics entered the picture globally soon thereafter. The conservatives started pushing the neo-classical paradigm of tax cuts for the rich and balancing the budget. The anemic recovery was used as an excuse to argue that the Keynesian prescription of boosting the economy does not work. The implication of the conservative’s  programme of  cutting the taxes on the rich leads to a decline in tax revenue so that the deficit tends to grow but since the budget has to be balanced, expenditures have to be curtailed - the opposite of what the economy needs. In Britain, the new Conservative government cut back the budget and reduced public sector employment by half a million.

In the USA, after the Democrat’s big losses in 2010 elections, Obama could not push his expenditure programme and had to come to a compromise with the Republicans. In the beginning of August 2011, the US government almost came to a grinding halt due to the logjam between the two political forces and this panicked the markets.

Euro zone had its own problems of coordination amongst its many disparate constituents. One after the other, Greece, Ireland and Portugal teetered under debt and had to be bailed out by others but on condition that they implement austerity packages. This led to revolt by workers and youth facing unemployment. The possibility of default meant that they had to borrow at higher cost and that worsened their debt situation. When the contagion spread to Spain and Italy matters have become difficult for the Euro zone because it is hardly feasible to bail out these economies. The possibility of sovereign default has increased and that has added to the difficulties of the financial entities that have leant to these nations.

The World economy faces a deep crisis for political reasons – that which is needed is not palatable to the conservatives who have once again got a grip over power in major economies of the world. India is no exception to this conservative mood with the government talking about balancing the budget in stages.

The rich, starting with Buffet have realized that in their own self interest, they have to accept higher taxes so that the governments can boost demand. In the pessimistic scenario now prevailing across the globe, the private sector on its own is unlikely to boost its investment. The citizens sensing trouble ahead are saving more for the rainy day so that consumption demand remains weak. Globally exports growth is weakening. Thus, the only source of boosting demand strongly can be government expenditures.

In France, Mr. Levy, the chief of Publicis and the president of the French association of private enterprises supported Buffet’s idea. 16 of the wealthiest French have signed a petition urging their government to tax them more. A group of 50 wealthy Germans have backed this petition. In Italy, the chief of Ferrari has weighed in with support.

The Indian well off avoid paying taxes both legally and illegally. They manipulate to get themselves huge tax concessions and then make even bigger sums as black incomes. The more property one owns the more tax concessions one obtains. For instance, income from dividend on ownership of shares in companies is exempt. Thus, if a Managing director of a big company gets Rs.30 crore of salary and bonuses, etc., but gets Rs.1000 crore as dividend, the tax liability is only Rs.10 crore, that is, a tax rate of 1% of the total income. No wonder less than 3% of the citizens file income tax returns and India has one of the lowest ratio of direct tax to GDP in the world.

Today, the corporates in the country (less than 0.1% of the population) control 20% of the national income, much more than what the 50% dependent on agriculture make. The legal exemptions they enjoy, called `tax expenditures’, amount to over Rs.5 lakh crores (See, Receipts Budget). Add to this the black incomes these corporates generate annually and their incomes turn out to be astronomical. The corporates pay an average tax of 23% of their legally declared taxable incomes whereas they should be paying about 33%. So, the Indian rich need not ask for a tax rate increase but only to allow the government to eliminate `tax expenditures’ and to voluntarily stop generating black incomes, to more than double tax collections which could give a big boost to the slowing Indian economy. 

arunkumar1000@hotmail.com