[Assam] Swaminomics - TOI

[Ram Sarangapani]

Its tax-time here, and thought this column from the TOI might shed some
light on how people in India fare. Highlights are mine.

I just can't believe that the highest tax rate in the 70's was 97.75%.  And
then this "*then the maximum he could earn after taxes, no matter how great
his assets, was just Rs 25,000 a year!" *
**
If that was true, that I am sure was one major cause for the growth and
development of an underground economy & black money. One can't render
everything to Caesar!
**
Well, thank heavens the rate today is 34% percent.

--Ram


  SWAMINOMICS  Paying record taxes is bliss
10 Feb 2008, 0000 hrs IST,Swaminathan S Anklesaria Aiyar

SMS NEWS to 58888 for latest updates
   Socialists love to soak the rich. They loved Indira Gandhi's garibi hatao
socialism in the *1970s, which raised the peak income tax rate to 97.75%,
along with a stiff wealth tax. *

*At one post-budget press conference, I asked what was the maximum a rich
person could earn after honestly paying taxes. An official replied that,
assuming a rich person's assets yielded 7% (which at the time was the yield
on national savings certificates), then the maximum he could earn after
taxes, no matter how great his assets, was just Rs 25,000 a year!*

In theory, this should have ushered in a socialist paradise. In practice, it
converted India into a massive black economy. Businessmen faced the choice
of honestly going bankrupt or dishonestly concealing income. No prizes for
guessing which path they chose. Actual collections of income and corporate
tax in 1970-71 totalled Rs 780 crore, just 1.8% of GDP.

Economic liberalisation cut the top income tax rate in stages from 56% in
1991 to 30% in 1997. Leftists said this was enriching the rich. Actually,
the rich started paying much more. Payments of direct taxes rose sharply,
from 2.4% of GDP in 1990-91 to 3.6% in 2000-01.

But even this paled before the huge upsurge after 2004. For 2007-08, the
budget projected income and corporate tax of 6.2% of GDP. Actual collections
have exceeded expectations so far, and the final figure may be a whopping Rs
300,000 crore, or 7% of GDP.

So, the rich have flooded the government's coffers as never before. Few
countries in history have experienced such a huge upsurge. What accounts for
it?

Lower tax rates<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>are
only part of the story. Obviously people are more willing to pay taxes
at lower than higher rates. But, as our table shows, lower tax rates in the
1990s yielded good improvements, but not the bonanza of the last few years.

Indeed, the recent imposition of a surcharge and cess means that the peak
rate of income tax<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>has
actually risen, from 30% in 1997 to almost 34% today. Yet, tax
collections have skyrocketed. So, lower tax rates after 1990 are only a
small part of the story.

A bigger part of the story is the abolition of wealth
tax<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>on
shares in 1993. During the garibi
hatao days, a company that declared good profits raised its share price, and
hence raised the wealth tax that its promoter had to pay. Extortionate
income tax rates made savings from white money impossible. So, promoters had
to sell their shares to pay wealth tax.

They were doomed to extinction if they kept profits on the books. Naturally,
they found a thousand ways of keeping profits off their books, depressing
share prices and their wealth tax liability.

The abolition of wealth tax on shares in 1992-93 attracted little public
attention since actual collections of wealth tax were small. Yet, this
single measure suddenly made it possible for businessmen to keep profits on
the books and improve shareholder value. Keeping profits on the books meant
paying more corporate tax, of course, but it also carried the
reward<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>of
higher share prices, without the penalty of wealth tax.

The immediate impact on tax collections was significant but not
revolutionary. Many businessmen were reluctant to declare all profits
honestly, in case reforms were suddenly reversed (as seemed entirely
possible at the time). The tax administration was so weak and corrupt that
tax evasion carried little risk.

This situation changed with the computerisation of
banks<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>and
tax records. This led to Tax Information Networking (TIN) after 2001,
enabling tax authorities to trace transactions and ask uncomfortable
questions. Stronger tax administration made tax evasion more risky, and thus
helped improved tax honesty further.

The clincher was the boom in the stock
markets<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>and
IPOs (initial public offers) of shares in the mid-2000s. Companies
raised money for expansion by issuing new shares to the
investing<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>public
at ever-higher prices. The price they could ask was typically a
multiple of their profits. So, the higher the profits they showed in their
books, the higher was their sale price. For the first time, business honesty
became massively profitable.

Finally, GDP growth accelerated from 6.2% in the 1990s to 8.7% in the last
four years. This yielded a boom in corporate profits and hence corporate
taxes.

The lessons are clear. Extortionate tax rates hit honesty, not riches.
Cutting tax rates by itself will not produce honesty: you need a stick (the
TIN system) as well as carrots (lower tax rates). Finally, you need a
booming stock market to convert tax honesty into a profitable launch-pad for
high-priced share sales.

This combination has now produced a tax bonanza of 7% of GDP. This is not
soaking the rich. Rather, it is a system where the rich have the right
incentives to share their prosperity with the tax authorities in the hope of
getting richer still. Direct tax collections of Rs 300,000 crore can
finance<http://timesofindia.indiatimes.com/articleshow/msid-2770156,prtpage-1.cms#>massive
rural infrastructure, skill development anti-poverty schemes. This
will reduce poverty far more than the garibi hatao tactics of the 1970s.