On Shekar Gupta - An Indian supporter of Arthur Laffer

By Girish Menon

Arthur Laffer found his two minutes of fame first under Ronald Reagan and now under Donald Trump. He is famous for his statement that government revenues will be zero if the tax rate is either 0 or 100 %. He further prescribed that for government revenues to maximise it should be low enough to provide incentives for citizens to want to pay tax.

Sounds right doesn’t it?

I have some difficulties with Laffer’s proposition especially with the part that the tax regime should ‘provide incentives for citizens to want to pay tax’. Isn’t it the job of every citizen to pay the taxes levied by their elected government? And in the case of the rich isn’t this your preferred government? So why not pay your share of taxes to keep your side a winner?

Laffer, however, is pragmatic to realise that tax evaders (no matter their patriotic image) usually carry out a cost benefit analysis on the costs involved in avoiding taxes and the benefits that follow from it. If the benefits are higher than the costs then they make a rational choice to evade taxes either legally or even illegally.

And there is a big global economy involving tax havens, accountants and lawyers who have successfully convinced the rich that the benefits of tax evasion far exceed the costs.

Economists who support Laffer argue that money in the pockets of the wealthy is better off for the economy because they will re-invest in new businesses thus boosting the economy and will reduce unemployment and put the economy on the virtuous cycle of growth and prosperity for all.

However, historical data does not bother such economists and their followers. The period following World War II saw the highest rate of taxation.  In the bastion of free markets viz. the USA it was as high as 80% or more. Tax rates in welfare state European economies was similarly high too. This coincided with the best economic growth and employment rates in these economies till it was shattered by the oil price shock.

After Reagan followed Laffer’s advice in the 1980s European economies also followed suit but at no time has economic growth nor investment rates exceeded the 1950-60s. Despite the evidence to the contrary, these economies continued to cut tax rates even further; yet growth and investment rates have failed to match post World War II levels.

Shekar Gupta is one Indian journalist who appears to be a fan of Laffer’s tax cuts. On the one hand he argues that the rich will not be affected by the tax rate hike in the latest Indian government budget. In the same breath he also argues that the tax hike will affect investment in the Indian economy.

The Indian economy’s growth rate has been stalling for some time even before the current budget. Unemployment has been high and rising. Investment levels were low pre-budget, with many firms filing for bankruptcy. So does India need more investment or more consumption to utilise the already existing production capacity? 

Also, won’t the tax cuts if proffered by the Indian government find its way into tax havens and join the tranches of hot money circulating the global economy?

India in my opinion, needs a rise in consumption by the poorer and lower middle classes to boost demand within the economy. Now may be the time for PM Modi to redeem his promise made before the 2014 elections and give each countrymen the promised sum of Rs. 15 lacs in vouchers which they have to spend within a certain time period. This could help revive the economy.

What effect it will have on the environment is unimportant since climate change deniers seem to rule the world.