It is eerie, but the tax policy choices that Finance Minister Mr. P Chidambaram (PC) faces today are near identical to his dream budget of 1997. At that time, both the hard “human face” economists, and the soft budget constraint Left, advocated that personal income tax rates were “correct”, should remain stable, and that attempts to decrease tax rates would lead to a severe decline in tax revenue. Plus it would be unseemly for the rich paying anything less than a 40 percent marginal tax rate. They laughed at the Laffer curve hypothesis saying that anything worked out on the back of a napkin was not rigorous enough, certainly not for the fiscal fundamentalists at MIT. The Laffer back of the napkin thesis is that the only method of increasing tax revenues is by increasing compliance, and the only method for increasing compliance is by cutting tax rates to “reasonable” levels.
Budget 2004-05 is about revenge. First, the revenge of the “human faced” socialists. Their ideas had been rejected by the world at large for the last several decades, and by India in 1991-92. Two Finance Ministers rank high on anybody’s wish-list of reformers - Manmohan Singh, the present Prime Minister and Mr. P Chidambaram, the FM of dream budget fame and now possibly of “dreaming a nightmare budget” infamy. How sweet the revenge must be for thesocialists to choose these respected reformers for deconstructing the Indian economy.
The imposition of a 0.15 percent transaction tax on all financial transactions has shocked all. The mystery is how this tax, discussed for a full month in the newspapers, with comments from FII’s and the brokers, and other experts, could have so jolted the participants. Everyone advocated it and nobody liked it. Is this possible? Yes – good idea, bad implementation.
There is little about In defense of globalization that can be described in less than superlative terms. This book by super-distinguished economist, Jagdish Bhagwati, should be on every policy makers table, and especially those who argue about the need for a “human face” to economic reforms. What Bhagwati demonstrates clinically, but with oodles of wit, is that globalization has brought development and unprecedented rates of growth to the poor countries, and the poor peoples, of the world. The guys with the ugly faces are those that have argued against globalization. These hapless types are the target of Bhagwati’s scalpel, and at the end of the marshalling of logic, facts, and figures, the human face is no longer recognizable.
There has been a lot of noise lately from politicians from all camps. What is noteworthy is that the noise is exactly that of the Garibi Hatao campaign in the early seventies. What may be worrisome to some is that if all the politicians are caught in a time-warp (along with most senior bureaucrats) then what would happen to the poor people of this ostensibly perennially poor country? There is nothing to fear. Globalization is ensuring that there is a check and balance between what the politicians profess and what they do. This is good news for the common woman, as the politicians are forced to hurtle towards benign irrelevance.
This paper attempts to measure the impact of the structure of income tax rates on compliance, and tax revenue. Compliance is simply defined as the ratio of people who file taxes to the magnitude of people who should be filing taxes. For example, in 2001-02, it is estimated that there were 62,000 individuals whose returns indicated that their taxable income was above Rs. 10 lacs. The earner income distribution in India suggests that there were 126,000 individuals belonging to this income class; hence, the compliance ratio for this class is 62 divided by 127 or 49.2 percent.
We have just witnessed history. By any criteria, the NDA defeat was a stunning upset. No one predicted it, or even came close, not even the dreamers within the Congress party. But that is what defines an upset; to get at a parallel, there are only three elections in the last 55 years that approximate what India has just experienced – Albert Fujimori in Peru in 1990, and Winston Churchill (UK) and Harry Truman (USA) in 1948. Surely, such a verdict calls for an analysis. Herewith, an attempt at identifying the winners, and losers.
Politicians seek mandates and add a spin to the result. If policies are to be based on the “mandate”, then we need to know what the people demanded in Election 2004. This should be useful in drafting guidelines - e.g. the Common Minimum Programme, and later on, actual policies e.g. the Budget.
Non-Indian spin doctors, beware. You are going to be outsourced to India in the near future. The United Progressive Alliance (UPA – Union of Parliamentary Activists?) has just released its Common Minimum Programme – a vision thing the new government will help make reality. (But whose government is it? That of the cabinet ministers led by Manmohan Singh or that of the Congress party led by Mrs. G? There is no previous instance of party rule in a democratic economy, though example of its prevalence in Communist dictatorships is not uncommon e.g. Soviet Union till the mid-eighties, and China even today).
Janus is a two headed Roman god of beginnings (and endings). The heads, naturally, face in opposite directions. Magus is a “strange and compelling” novel by John Fowles in which nothing is quite what it seems. So much so that the author provided, perhaps for the first time in literary history, two separate endings – the reader could choose the one of her liking!
