The color of money

There is no nadir as far as Indian politics is concerned. It redefines the term every time it plays out. As is happening with the sudden enthusiasm for tracking “black money.” It’s people’s money “stashed” abroad which will be used to develop villages, the clown says. The party of thieves isn’t happy as they lost an opportunity to add another issue to their basket full of other rotten issues. The party of bandits has promised more plunder if it come to power. There may be a lot of disagreement between the clowns, thieves and bandits, but they all agree on one thing – more plunder.

A government has as much a moral right to tax as a rapist has to rape. But that doesn’t stop it from conjuring up myriad rules and regulations intended to smother everyone and keep them in check. As Ferris says, how can you rule over men if you don’t make them feel guilty? Both the Congress and CPM are taunting the BJP over FERA. If there was one act that put the fear of God into any honest businessman out there, it was FERA – the Foreign Exchange Regulation Act. Draconian it was called, and draconian it was. If you committed a “crime,” or the Enforcement Directorate thought you did, you went to jail till they investigated. All over the Indian government’s Silas Marner-esque attitude towards foreign currency. And these crooks want to bring it back, not that it isn’t already there in a more “benign” form.

These people speak of “money laundering,” hawala and “black money” as if its their personal money that is being moved around without their consent. No doubt some politicians, and bureaucrats, and even criminals might use these “facilities” but more often than not it is someone who has no intention of handing over his hard earned money to “virtuous” thieves. Then there is the bogey of terror financing, as if staging a terrorist act requires a billion dollars which means all movement of currency has to be tracked. Of course it has more to do with “tax” than with “terror.” Is it a coincidence that both words start with T? I have written about this previously – here and here. Also read this old Swami column on hawala, if you haven’t done so already. “The very word hawala is derived from an ancient Persian word for trust,” he writes. And tax?

If the intentions behind the great swindle are not yet clear, this report on an Economist debate should help. Why would someone have such an idea?

Let me give three reasons why I believe the rich should pay higher taxes. For the sake of concreteness, let us say that we are talking about introducing an 80% marginal tax rate on all annual incomes in excess of €1m, leaving the rest of the tax system unchanged. I believe that such a policy reform could and should be implemented immediately in countries such as the United States, the UK, France or Germany. I do not want to be too dogmatic about the exact numbers: it could be that the right policy should rather involve a 70% marginal rate in excess of €2m, or a 90% marginal rate in excess of €500,000. But you get the idea: we are talking about a major increase in top marginal rates (currently around 40%) applied to very, very high incomes (less than 0.5% of the population).


The main objective of raising marginal tax rates on the rich is not to raise additional tax revenue, but rather to keep top compensation under control and to curb the grabbing hand. In fact, the proposal that I am making – introducing a 80% marginal tax rate on all annual incomes in excess of €1m, leaving the rest of the tax system unchanged—would probably raise limited additional tax revenue. First because it would apply to only a small fraction of the population—less than 0.5%. [This is fortunate: in the current recession context, it would be pretty silly to raise tax on substantial fractions of the population]. Next because the main effect of this 80% marginal rate would probably be to reduce drastically the incentive to take away more than €1m from one’s company, so that the number of taxpayers in the €1m+ bracket would probably fall substantially. This is what happened during the 1932-1980 period, and available evidence suggests that this would actually a good thing. I.e. this would not correspond to a fall in real productive efforts and economic output, but rather to a redistribution of income flows.

Follow the whole debate here. Beyond “redistribution” and “give me my cut” there is the simple “you are too rich” reason. “Garibi hatao” is an impossibility. “Amiri bhagao” is much easier. That’s what Indira Gandhi and her kooky clan managed to do. And that’s what our new politicians have promised they will do. Taxation must be voluntary in nature, always. But in a “welfare state,” that’s asking for the moon.

Trackbacks are closed, but you can post a comment.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s