Why is the Government shying away from taxing the rich?: Look at the US

The inequality in the country is such that taxing the rich and a higher Direct Tax rate is unlikely to hurt. The US example also shows that its growth rate was highest when the tax rates were higher

Why is the Government shying away from taxing the rich?: Look at the US

Malay Sengupta

Experts can often be exasperating. Their propensity to differ among themselves on virtually every issue frequently leaves a layman as perplexed as ever. However, on some rare occasions they do achieve unanimity. And when they do, it is best for Governments to follow them.

One such issue is the way out of the current recession. Virtually every expert agrees that the way out is for the Government to put money in the people’s pocket and to give a stimulant to business particularly, the MSMEs. Virtually all of Europe and USA are following this.

It is easy to understand why. The productive facilities are unimpaired. The infrastructure is intact. There is, hopefully, a temporary inability to use the facilities fully or partially, causing unemployment and hence shortage of money for immediate expenditure and a reluctance to spend owing to the uncertainties over future wages as well.

Putting money in people’s pocket is part of the answer. The other part is to bring business activities, particularly the small and medium sized establishments, back on rails as soon as possible.

Even when a business is closed, it incurs certain expenditure. Interest on loans and wages (if paid) are two major components of such expenditure. Therefore, they also need some stimulus to take care of such expenses incurred during the period of closure and a small period thereafter while the business gradually recovers.

But this is an unforeseen and sudden requirement which obviously cannot be met from the Government’s budgetary resources.

How to raise the money? IMF feels raising a loan should not be a problem. Some economists fear about raising too much loan. The government also apprehends that if it takes too high a loan, its ability to repay will be affected and credit ratings will be downgraded.

What is an obvious alternative to market borrowings and IMF loans with strings attached is raising tax rates and augment the Government’s revenue.

But it seems to have become an article of faith that high tax rates are inimical to growth. How did the world fare then when the tax rates were high? We may look at the Mecca of free market- the US. Let us take two 40-year periods, 1940-1980, and 1980 to 2020 to test the proposition.

In the earlier period the top marginal Income tax rate in 1941 was 63%, from 1944 to 1964 it was above 90%. In 1965 it was brought down to 75% and further to 70% next year where it remained till 1981.

It is instructive to remember that during this period, the US fought the 2nd world war, the Korean War, the Vietnam war and of course the cold war. US business dominated the business world. The GDP increased from 1.336 tr.US$ in 1940 to 6.76 tr. US$, an annualized growth rate of about 10%. The country clearly had not done badly.

In the latter period, the top marginal tax rate varied between 28 to 39%.

During this period between 1980 and 2020, US dominance was challenged first by Japan and then by China and its dominance in brick and mortar business ended. Its GDP increased from 6.76 tr. in 1980 to 19.73 tr. US$ in 2019, an annualized growth rate of about 4.6%.

The lower taxes do not appear to have given any decisive advantage to the US. But the Stock Exchange boomed. The Dow-Jones index which was 131 in1941 rose to 824 in 1980 but thereafter exploded, reaching 23,346 in 2019 (all opening figures).

Another thing grew quite fast and that is inequality.

To fight the war against COVID-19, (and recession), should not the Government then think of increasing revenue through higher income tax, property tax, and reintroducing inheritance tax on the rich, at least till the economy is put back on the rails?

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