Monday, 30th October 2017

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Taxes to lure voters

India should consider a presidential system like that of the US

By Writing On The Wall- Ashok V. Desai
  • Published 12.04.16
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Hillary Clinton and Bernie Sanders at a Democratic presidential debate, Miami

It is an election year in the United States of America. Hopeful politicians are lining up to win their party's nomination. Hillary Clinton will almost certainly win the Democratic nomination; Donald Trump is leading the Republican race. However, it is not enough for candidates to show their face in State primaries and ask for a vote. They also have to try and persuade the voters; to do so, they must disclose what reforms they will carry out.

This policy competition throws up many ideas. In India, parties issue vague, high-sounding manifestos which are forgotten almost as soon they are issued; in America, the issues are advertised, and debated in public. Some ideas are harebrained, some seriously thought out, many are good enough to be turned into policy. This intellectual side of the presidential election is hardly ever noticed in India; but some of the proposals would be worth consideration even in this country.

The US, like other Western countries with an aging population, faces a fiscal problem. Its tax revenue is far short of expenditure, and its public debt has risen faster than GDP. Once it rises above a certain level, debt can become uncontrollable, as it did in Greece; even before it does so, it can slow down growth. This was the first major problem facing Barack Obama when he became president.

To tackle it, he appointed a commission in January 2010 chaired by Erskine Bowles and Alan Simpson. It submitted a provisional report in 2010 and a final report in 2013. It proposed a reduction in fiscal deficit of $4 trillion over 10 years, three-quarters by cutting existing benefits and a quarter from new revenue; the bias towards expenditure cuts was obviously motivated by the balance of legislative power, especially the Republicans' passion for small government and hatred of subsidies to the poor. It aimed to balance the primary budget by 2015; after that, the debt-to-GDP ratio would start falling, to 60 per cent by 2023 and 40 per cent by 2035. The revenue-to-GDP ratio would be capped at 21 per cent.

That sounds attractive, except that it involved drastic cuts in social expenditure. Obama could not act on the report because of the fractured state of opinion in the legislatures; but its proposals have been on the table ever since. Simpson-Bowles have since started a Moment of Truth campaign to popularize their proposals.

Amongst the candidates, Hillary Clinton proposes to increase income tax, estate duty and gift tax on richer assessees, tax foreign profits of American companies, and reduce incentives given to domestic gas producers. Her maximum personal income tax rate would be 54.2 per cent.

Bernie Sanders is to her left. He wants to spend generously on health care, family welfare and medical leave, scholarships in state-owned universities, and infrastructure; he would finance the expenditure by raising both direct and indirect taxes. He had at one time proposed a 20 per cent tax on carbon emissions, but then went mum on it; presumably the idea was unpopular with those who would fund his campaign.

Last year he introduced a bill with a comely Congresswoman, Jan Schakowsky, which is called Sanders-Schakowsky Stop Corporate Tax Dodging Act. It would remove the tax exemption American companies enjoy on profits earned abroad as long as they leave the money abroad, and tax the profits as they are earned. It would also deny them credit for taxes they pay to the governments of the countries in which they operate. Many American companies park their foreign profits in tax havens to avoid paying taxes in America; Sanders-Schakowsky would stop that. But if their foreign profits are taxed by both the country where they are made and the US, that would be the death of foreign investment by American firms.

Ted Cruz is a rightist. He would repeal corporation tax, estate duty and gift tax, and replace the seven current income tax rates by a single 10 per cent rate, increase standard deduction and most other credits and deductions. Finally, he would introduce a consumption tax of 16 per cent - shades of Nicholas Kaldor, who proposed replacing income tax by consumption tax half a century ago.

Donald Trump is even further to the right. He would increase standard deduction almost four-fold, slash marginal tax rates on individuals as well as companies, and repeal minimum alternative tax, estate duty and gift tax. Mark Everson is for the proposals of Michael Graetz, a professor of Columbia Law School who worked in the Treasury for a while, and who suggested capping corporation tax as well as maximum income tax at 25 per cent and making up for the fall in revenue by means of a goods and services tax.

This idea of a "flat tax" is popular with many candidates; it is on the rate that they differ. Rick Santorum is for 20 per cent; Rand Paul is for 14.5 per cent. It may be noted that income tax becomes a flat tax above a certain limit in all countries; it is the rate that varies. In India it is 33.6 per cent over Rs 1 million; in the European Union it varies from 9 per cent in Montenegro to 56 per cent in parts of Finland.

In India, the finance bill is moved by the finance minister and passed on the last day of the budget session. Other MPs may persuade the finance minister to embody something they want or modify his proposals; but they cannot - or at least, do not - move their own finance bills. In the US, any Congressman can move a finance bill if he can secure enough support. And those who do, give their bills sexy names to tell voters what they have done for them.

Congressman Chaka Fattah introduced a tax credit of $4000 for college fees in 2009. By 2014, things had got so complex that the Congress passed a Student and Family Tax Simplification Act; it reduced the credit to $2500. Hillary wants to protect this credit from Congressmen's whims and make it permanent. And if anyone spends more than $5000 in a year on medical care, and it exceeds 5 per cent of his income, she would refund the excess.

Jealousy is an important part of politics everywhere. In the US, there is a Cadillac tax. It has nothing to do with the car. American companies save their employees tax by financing their medical costs. The Cadillac tax is imposed on such benefits; if an employer spends more than $10,200 on an employee, he has to pay a 40 per cent tax on the excess. This is obviously controversial, and Hillary has promised to repeal it. She would also give tax credit for workers' training costs, and for profits distributed to workers.

Thus, the American presidential election is not just the show of rants, meetings and buntings. It also generates thinking and debate on serious issues like taxation, and gives the people a chance to choose candidates who propose policies they like. Our Parliament hardly serves the purpose for which we elect it, namely to control and guide government policies towards what we want. Maybe we should try the presidential system.