Dear Abhijit Banerjee, Congrats on winning the Nobel Prize.
In a recent interview, you castigated economic journalists like me for ignoring economic evidence and lauding the recent cut in corporate tax rates. To combat inequality, you want to soak the rich and distribute the cash to the poor, and claim journalists think that the rich must be bribed by tax breaks to function. You contest our conviction that fast GDP growth is an excellent antidote to poverty.
Let me respond. You say evidence in your new book shows corporate tax cuts alone won’t boost investment. Is that different from what some of us have said? This column told the finance minister: “Your gamble of cutting corporate tax will succeed only as part of an overall strategy to make India more competitive. You must convince your Cabinet colleagues to make other inputs like land, labour, railway freight rates and electricity as cheap in India as in neighbouring Asian competitors. Cutting taxes rates alone will not suffice.”
You question our claim that global investors are shifting from China to Vietnam and Bangladesh but not India because of our higher tax rates and input prices. You say better evidence comes from the US where different states levy different tax rates and yet high-tax states grow fast. However, the main US business taxes are federal and apply to all states. Second, states with huge historical advantages — California has Silicon Valley, New York is a global financial centre — can get away with high taxes because their lucrative giant industries will not shift. But smaller entrepreneurs have shifted in droves from California to low-tax Texas. Finally, American states compete fiercely with tax breaks to attract big projects, like Amazon’s second headquarters. US evidence actually proves that tax rates matter hugely.
We journalists favour a tough tax administration that jails hundreds of crooked politicians and businessmen. That will improve tax revenue and equality far more than uncompetitive high taxes.
Do high taxes reduce inequality? Indira Gandhi raised the top income tax rate to 97.75%, along with a 3.5% wealth tax. That reduced inequality, but also created a massive black economy and entrenched the pathetic Hindu growth rate of just 3.5%. Between 1947 and 1980, India’s population virtually doubled while the poverty ratio stayed unchanged. So, the number of poor people almost doubled in the era of high taxes and falling inequality. By contrast fast GDP growth (with rising inequality) in the 2000s reduced poverty rapidly.
You say Scandinavian countries with high tax rates have grown fast. Voters in those well-governed countries trust politicians to use tax money well. If Indian politicians had as good a track record, surely the case for higher tax-and-spend would be stronger. Alas, Indian politicians claiming to be Robin Hoods have used socialist controls and high taxes to line their pockets and build patronage networks. Maharashtra chief minister A R Antulay got builders to donate to his charitable trusts in return for contracts. It’s like Fagin’s song in the musical “Oliver”:
“Robin Hood, what a crook, Gave a bit of what he took.
Charity’s fine, subscribe to mine, I’ve got to pick a pocket or two.”
You want to raise tax rates and give more to the poor. Don’t politicians do that already? The peak income tax rate is up from 30% in 1997 to 42.7% today. This helped finance the PM Kisan Scheme — Rs 6,000 per year to all farmers. State schemes in Telangana, Odisha and Jharkhand offer even larger sums.
Every state election brings new freebies. Jayalalithaa won in Tamil Nadu promising free cellphones; laptops for students; maternity assistance of Rs 18,000; free 100 units of electricity every two months; waiver of all farm loans; fisherfolk assistance of Rs 5,000; 50% subsidy for women on mopeds or scooters; eight-gram gold coins for women getting married; and much more. Jayalalithaa earlier provided 20 kilos of free rice per family, a free mixergrinder and fan per family, subsidised Amma kitchens, and subsidised goats or cows for rural families.
Yet this combination of higher taxes and bigger freebies has not created an egalitarian utopia. The recent cut in corporate taxes is an attempt to find another way forward, but will work only with many supplementary reforms.
You are reported to have discussed but not designed Rahul Gandhi’s NYAY proposal, giving Rs 6,000 a month to the bottom fifth of the population. One report says you felt Rs 2,500 a month might be the maximum possible without killing fiscal discipline. Well, many of us financial journalists have long favoured converting India’s many leaky subsidies into cash transfers that would exceed Rs 2,500 a month. Sometimes, we agree.