Home > Uncategorized > My tweets on the corporate tax cuts

My tweets on the corporate tax cuts

The total revenue foregone by Govt over last week is 1.45 lac crores in tax reliefs to corporates announced now + 50,000 crore is export credits given away earlier. So in all, about 1.95 lac crores of revenue has been given away by @nsitharaman – about 1% of GDP. 

Sanjay Jha

@JhaSanjay

On a day when India’s ranking remains wretched on the Global Hunger Index , the Finance Minister gives a massive Rs 1.45 Lakh crore and more in corporate incentives.

Weird, because the government instead needs funds for health, education, skilling, jobs and infrastructure etc.

220 people are talking about this
While the lay public will call these give aways to the corporate sector as “tax cuts” and while the corporates will welcome the bonanza, we must not forget these are NOT, repeat NOT, tax cuts until we know who is going to pay for these so called tax cuts.
A tax cut happens when the Govt. cuts its own expenditure and passes on that saving on its expenses to tax payers. In short the Govt. cuts its own consumption and puts that money in the hands of the people to spend or invest as they please.

Such a genuine tax cut is hugely beneficial to the economy as people investing the extra income in productive assets create more immediate demand in the economy & and also push out the production envelope 4 the future.

Nothing of this sort has happened.

Govt. has no plans to cut its expenditure. So if its expenditure is 2 continue as b4, how will these tax cuts be paid 4?

They can be paid for only in one of the 2 ways. Either somebody pays higher taxes in the system or the Govt prints more money by monetising higher deficit.

Nobody can be made to pay higher taxes. In fact the Govt will have to cut taxes on households to bring them on par with corporates. So we can be sure that the tax cuts will be paid for by a higher deficit.

The earlier deficit was projected at 3.5% of GDP. This has now gone up to about 4.5% of GDP. Considering all the fudges, off balance sheet borrowings, and postponed payments, the full deficit of centre + states has now jumped to about 11% of GDP.

That is a huge hole 2 fill.

Will the extra 1% of deficit be monetised? In which case the burden of tax cuts will fall immediately on those without pricing power in the economy. This is the farm sector.

In short if the tax cut deficit is monetised, the farmers & rural workers will pay for the tax cuts.

If that be so, will the announced tax cuts to corporates, and to be paid by the income challenged rural & farming communities actually act as a fiscal stimulus for the economy.

Obviously not. Rural wages have hardly grown last 6 years. Farm produces prices are in a deflation.

In such a situation to argue that a tax cut to corporates financed by monetisation of deficit, the burden of which falls on the income challenged sectors is an act of economic lunacy.

It will do nothing of that kind although stock markets will celebrate the income transfer from rural pockets to corporate treasuries b/c that means higher corporate profits.

But stimulate the economy it will not. This mere income transfer from poor too rich. Crassly stupid.

If the deficit is not monetised, then we are back to my basic economic equation. Which is that now you have a higher combined deficit of 11% of GDP when financial household savings are just 9% of GDP.

How in the world is the Govt going to fund the extra 4 trillion INR from?

Remember sovereign borrowings by issuing bonds abroad is an option but it can’t produce INR which the Govt needs only through monetisation by @rbi.

So the dilemma remains. Except that the deficit has gone up by 1 percentage point more than earlier.

So step back from the drama a bit and ask yourself what has Govt actually done here?

The answer is that it has pulled some very fine wool over your eyes. The classic grifter trick whereby an increase in deficit financing is cleverly packaged as a tax cut 4 the gullible folks.

So here is the play. Arbitrarily slap cess & surcharges on existing taxes on budget day. Present the worst possible budget butt keep deficit constant. 6 months later, roll back the cess + surcharge, thrown in a spurious tax cut & increase deficit to what it should have been.

You laugh all the way to the bank b/c the higher deficit is now forgotten in the euphoria of relief coming from the spurious tax cuts.

Brilliant politics, spurious economic as usual from the greatest feel good guru of all times.

That is the take home truth.

 

Categories: Uncategorized
  1. Shiv Narain Singh
    September 21, 2019 at 1:05 am

    I can’t really understand what should have the govt done to revive the economy? Is this step harmful to the economy to the extent you have elaborated? Will the rural and agriculture sector really suffer from this step to the extent you have stressed upon?

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