Should Indians also pay the 'Warren Buffett' tax? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Should Indians also pay the 'Warren Buffett' tax? 

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In this issue:
» Does China have the solution to Euro zone's economic woes?
» Even star fund managers misread China in 2012
» RBI finds a supporter in Nobel laureate
» How can Indian BPO industry reinvent itself?
» ....and more!


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00:00
 
To be counted as arguably the best investor in the world and still not be a core capitalist at heart is certainly one of the biggest contradictions out there. But both of these traits co-exist rather peacefully in Warren Buffett we believe. And there's a pretty valid reason why there's a place for socialism in his heart. As he himself points out, he considers himself lucky to be born in the US. And that too at a time when it was going through one of its best phases ever. He doubts whether he would have achieved a fraction of what he has achieved had he been born in any other country. Thus, it is from this line of thought his desire to give something back to the society has emerged perhaps.

And how does he propose he wishes to accomplish this objective? One of the ways to do this is higher taxation as per him. He has been a pretty vocal critic of the tax disparity that exists in the US between the ultra rich and the rest. And thus wants people like him to be taxed higher. For a scenario where the ultra rich are paying tax rates that are much lower than the American middle class is simply illogical as per him.

As is often the case, his idea seems to have found favour outside of US shores too. And a certain bureaucrat has proposed something similar for India as well. Mr Rangarajan, a key economic advisor to Prime Minister Manmohan Singh, has said the government could consider imposing a marginal tax rate higher than the current 30% on those with "substantially higher income."

Mr Rangarajan is of the view that we must start debating unconventional ideas. As per him, fiscal deficit can't be contained by curbing expenditure alone and there is a need to raise revenues as well.

Well, we are all for reducing the income tax disparity between the rich and the poor. And there is no reason why the rich should pay taxes at rates far lower than people below them in economic status. But we don't think things like fiscal deficit can be bought under control using higher tax rates. Simply because the Government is certainly not the best capital allocator out there. For had that been the case, we wouldn't have had the fiscal deficit we are having in the first place. No sooner will we get more revenues from higher taxes, the Government will find new ways and means to squander the same and we will be back to square one.

Then there is also the problem of evasion becoming even more rampant leading to even more black money in the system. We believe that policymakers will do themselves a world of good if they stop thinking in terms of rearranging the existing economic pie. For the focus should be on growing the same through growth oriented policies like reforms and infrastructure development. At the same time, efforts should also be made to curb wasteful expenditure. Only then we can have a sustainable reduction in deficit. Imposition of still more taxes is just not the way to go.

Do you think Mr Rangarajan's proposal of raising taxes for the super rich makes sense? Share your comments with us or post your views on Facebook page / Google+ page

01:39  Chart of the day
 
In nominal terms, there's no doubt India's GDP has kept on inching higher year after year over the last three decades. In fact, even in real terms, the growth has been pretty impressive. But what if the conversion factor i.e. the inflation itself is flawed? This isn't entirely impossible for the inflation we encounter in our day to day lives certainly seems higher than the official figure. How then would one assess the growth in real GDP if inflation is highly understated?

The answer lies in today's chart of the day perhaps. For it measures growth in nominal GDP in terms of its ability to buy 10 gm gold coins. As the chart highlights, the GDP to gold ratio isn't certainly a straight line. This means that some of the growth in GDP in real terms could also be due to excess liquidity sloshing around. Agreed that this may not be the most perfect indicator, but is certainly a lot more reliable in bad economic times we believe.

Source: RBI


02:20
 
It is not easy being an active fund manager. The pressure is tremendous as there are expectations to consistently beat the benchmark indices year on year. Especially since these funds charge premium fees for money management. What makes it even worse is that even reputed fund managers find it difficult to consistently outperform. Indeed, that has been the case for fund managers such as Anthony Bolton, Mark Mobius among others.

Many of them bet big on China. But Chinese stock markets tanked during 2012 as a result of which funds managed by star fund managers fell short of their benchmarks by a considerable margin. This is perhaps the sad outcome of what happens when economic growth is extrapolated to assume that even stock markets should go higher. However, economic growth is only a necessary condition and not a sufficient one. What also matters is high return on capital and honest management. And this is where Chinese companies have come a cropper we believe. Little wonder, Indian benchmark has outperformed its Chinese counterpart even though economic growth in the former has been lower.

02:53
 
The Reserve Bank of India (RBI) is not known to find many supporters. Central banks in Western economies would not touch RBI's policy stance with a ten foot pole. Our own government is perpetually at logger heads with the RBI governor. After all our central bank is not one to tread the beaten path. While its counterparts globally bow to the government demands, the RBI sticks to its conviction. We were therefore rather pleased to know that that a noted economist has agreed with RBI's view on additional bank licenses. And he is none other than Nobel laureate Dr. Joseph Stiglitz.

As reported by DNA, Dr. Stiglitz is as against bank licenses for corporate as are our central bankers. In fact he believes that the dangers of conflicts of interests far outweigh any economies of scale. While the RBI is under immense pressure from the government to issue licenses, it has set very strict criteria. We hope the government allows our prudent central bank take independent decisions on this.

03:23
 
Along with the sovereign debt crisis, the Eurozone is facing a massive economic slump. The irony is that these countries have a huge pool of untapped resources. The resource is in the form of 90% of the more than 12 million Eurozone unemployed youth. An article in Forbes suggests that if these youth are rightly mobilised, they could generate about US$ 38 bn in annual government revenues. In addition, the purchasing power that these newly employed people would exercise, would provide the necessary economic stimulus to these ailing economies. But how can the potential of these human resources be harnessed? The article suggests creation of special economic zones in the remote hinterlands of countries such as Greece, Spain and Italy.

In fact, China's fast growth story has its roots in the special economic zones such as Shenzhen. The Shenzhen idea has even worked in a country like North Korea. So what stops it from working in Europe? The biggest roadblock is draconian labour laws. For instance, in case a business venture fails, Italian laws make it nearly impossible to cut down the workforce in order to make cost adjustments. Such restrictive labour laws make these countries highly uncompetitive. Employers avoid expansion and hiring even if the possibilities exist. For the Eurozone to really bounce back, it has to go back to free market liberalism, the same principles that were responsible for their development in the 20th century.

04:06
 
Back in the 90s, the Indian IT industry saw a new growth driver in the form of BPOs or Business Process Outsourcing Units. Over time, the industry was one of the fastest growing industries in the country. It gave jobs to millions. In fact, 25% of all IT jobs came from BPOs. The labour arbitrage that India provided was simply irresistible and companies from all over the world flocked to India to either set up captive units or avail services of generic BPOs. The past was undoubtedly glorious.

But the question now is what next? The head of GECIS (GE Capital International Services) has talked about the way forward for Indian BPOs. The industry which has been rechristened as business process management or BPM would now depend on developing expertise. With countries like Philippines coming up as BPO hubs, the differentiating factor of labour arbitrage is rapidly fading. The thing that companies need to develop is expertise. Expertise to manage processes end - to -end. Expertise to provide that extra edge to services. This is what will drive future growth. If Indian companies can understand and develop this expertise, then they would be all set to become global giants in the BPO space.

04:43
 
Meanwhile, Indian equity markets indices have been trading weak today with the Sensex lower by around 60 points at the time of writing. Metal and FMCG stocks were seen exerting maximum selling pressure. Major Asian indices closed mostly weak today with Europe trading mixed currently.

04:52  Today's Investing Mantra
"Most people are too fretful, they worry too much. Success means being very patient, but aggressive when it's time." - Charlie Munger

You thought you knew Buffett well enough? How about Charlie Munger, the man even Buffett looks up to? Test your Charlie Munger quotient here
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14 Responses to "Should Indians also pay the 'Warren Buffett' tax?"

l p pandey

Jan 10, 2013

i am a lay man and find myself unable to understand " Should Indians also pay the 'Warren Buffett' tax?" from the contents of your write up.

Like 

Selvakumar

Jan 9, 2013

No this will not be productive. Money laundering can increase as in the past. Taxing more on the higher tax contributors is like trying to kill the milking cow for more milk.

Instead they should try to increase the tax net, making the zero tax payers to pay at least 5% tax, and they are not to sit and cry foul to caugh up 5% which is like chicken feed. There is a need to bring more people to pay taxes towards nation building, like in the developed nations. The ratio of tax payers to the country's population is so pathetic, it is just so abysmal, may be just 2% of Indian population pay taxes and 98% has gotten scot free thus far. How much more this 2% people pay for 98% to sit on the fence to watch them bleed to death. This is truly unfair.

They should have political will to touch this crowd for they would not want to lose thier votes.

Then this boils down to Vote Bank Vs Sensible Economics.

Like 

Tikam Patni

Jan 7, 2013

On the contrary, the tax rates should be decreased across the board on one hand and increase the tax payer base by bringing in Agriculture and Political Parties into the tax net on the other. Also Eliminate loopholes and exemptions except savings oriented. Prune drastically Govt waste. Stop schemes like MPLAD and MLALAd ETC. Eliminate all perks to Netas. Pay them good salaries and then let them manage within it. Eliminate unnecessary posts of Governers, President, Vice President etc.

Like 

svk

Jan 7, 2013

Tax agricultural income and get back the black-money from tax havens and increase those taxed from the miserable 10% at present then think of taxing the higher salaried class at a higher rate.
Rangarajan seems to have got this suggestion wrong.

Like 

Albert

Jan 7, 2013

Are you kidding me? Already the government is robbing us blind by taking HALF of what we earn in form of various taxes -- income tax, capital gains tax, tax on interest income, dividend distribution tax, service tax, sales tax, VAT, entertainment tax, tax on petroleum products, luxury tax, wealth tax, airline tax, etc., etc., etc.

And what do we get in return? Horribly poor infrastructure, polluted environment, unsafe streets, unreliable water & electricity supply PLUS the police baton if we dare to protest. Almost a billion Indians are still living either below or very close to the poverty line while inflation shows no sign of abating.

Doesn't matter how much you feed this monster. It will eat it all without a burp and continue wasting taxpayers money for its nefarious social schemes, for buying votes while taking out full page newspaper ads showing what it has done for the aam aadmi. It's all smoke and mirrors.

Don't fall for the so called 'Warren Buffet' tax. It will not work even in countries that have at least a modicum of accountability, because they'll waste it on war and welfare. So in India its like throwing good money after bad.

Like 

indubhushan

Jan 5, 2013

Only less than 10percent of Indians fall in the income tax paying category and 90 per cent are not bothered . The agriculture sector is also not taxed . So why not change the IT to something different which will cover everyone to contribute for the development. One option may be on turnover. So the high consumers and service users will make higher . The BPL can be compensated by Govt. by grants generated out of these funds.
The best economies today are of the mid-east countries where(even before the current oil boom ) there was never any Income Tax(like also the agriculture sector in India).we should follow this example which is more suited to our area that the US/British models and change the lopsided arrangement where only 10 per cent (i.e. mostly the salaried class)of the population is loaded.
Let us not be jealous of people who earn more

Like 

G.P.SANGAL

Jan 5, 2013

Though increase in tax rates for super earners is a good idea we have ensure sufficient incentive for them to earn more. 30% to 33% is a fair amount of taxation. We have to, however, improve our tax collection. It is anybody's guess as to how much tax is evaded. A seemingly legitimate way is to show earnings as agricultural income.

Like 

Krishna

Jan 5, 2013

Yes. It is rather silly that people wiht lower income should be taxed at a lower rate.

It is time, India did the correct fiscal thing...a) Tax high income earners at a higher tax bracket
b) Take bold Steps to weed out black money and bring in immense punishment to deter people generating/hoarding black money

Like 

Dabasis Dutta

Jan 4, 2013

The GDP to Gold ratio is worse only due to the $ exchange rate, I have never understood why did the INR depreciate in the 1st place.. Gold has increased between Aug'11 to Dec'12 by $63 (13%), whereas in INR, the rate has increased by approx Rs 8700 (41%). Rates used from goldprice.org. It would be interesting to see the price of gold in PPP basis.

Like 

Kirti Shah

Jan 4, 2013

Mr Rangrajan idea is senseless.Even more revenue is generated by way of income tax no purpose is going to be served till Corrupion is stoped. Expenses are to be reduced at ministry and bureaucrates level.

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