Do Lower Taxes Make You Happy? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do Lower Taxes Make You Happy? 

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In this issue:
» Govt. proposes lower taxes for you. So what?
» Get worried about deflation, not inflation
» India's next looming crisis - water
» Swine flu adds to airline woes
» ...and more!!

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The Indian finance ministry yesterday released its 'Direct Tax Code 2009' (DTC), a proposal paper on simplifying India's complicated tax structure as also to bringing down overall taxes - both with a view to improve compliance and thereby improve the government's tax revenues.

Given that the media has covered most aspects of the tax proposals on companies and individuals, we will leave it at that. Our question is - what's the priority for you, the tax payer. Do you want lower taxes as the ministry has now proposed? Or are you willing to accept higher taxes, provided the government utilises the income so generated in a proper manner?

See, the Indian government anyways has no point in worrying about you, the individual taxpayer (who is in the minority). This is because elections here are decided by agriculturists, whose farm incomes are tax exempt. Then, high levels of poverty and tax evasion keeps the other majority outside the direct tax net. So, it is unlikely that aam aadmi will be a government priority when it comes to tax reforms. People like us want proper service deliveries from the government, whether it is on the healthcare front, or electricity and water supply, or even security.

With so much corruption inherent in the government machinery, even the simplified tax rules will be twisted and therefore compliance will remain a major issue in India. Still, while lower and rational taxes will make us all happy (or so we think), we would wish for the government to utilise its tax receipts in a more constructive manner rather than using them in fulfilling their wasteful expenditure needs.

01:06  Chart of the day
Today's chart of the day shows how India lags its emerging market peers like Brazil and Russia, and even the US and world average, when it comes to the government's tax to GDP ratio. This tells the story that despite one of the highest tax rates and amongst the most complex tax structure in the world, how a notoriously corrupt and poor tax-collection system has spoiled matters. So, will the government's new tax code really work is worth questioning!

* Average of 179 countries; Source: Index of Economic Freedom 2009

Coming back to the point - do lower taxes make you happy? If one were to go by a recent survey done by the Organization for Economic Cooperation and Development (OECD), it is higher taxes that make people in Denmark, Finland and the Netherlands amongst the most happiest in the world. But then these North Europeans pay some of the highest taxes in the world. Residents of Denmark, for instance, pay about two-thirds (around 67%) of their income in taxes. So are they amongst the happiest of the lot?

It all comes down to what you get in return! A safety net and world class living standards. Given the way our government spends its tax money, can we ever aspire for that?

Sometime in the 1930s, a gentleman who answered to the name of Ralph Elliott developed a concept whereby he postulated that investor psychology moved from optimism to pessimism and back again. His theory has now acquired a cult status and is widely known in the technical analyses circle as the Elliott Wave Theory. Robert Prechter, perhaps the most successful practitioner of this art and the one responsible for giving this theory a new lease of life has made a bold prediction using it. You should perhaps listen to him because quite a few of his forecasts in the past have proved to be uncannily accurate.

Prechter has argued that we've seen only the first phase of the downturn and next to come could be a credit implosion that will once again destroy the value of stocks. Hence, it is not the time to worry about inflation and recovery but to start preparing for a deflationary depression. A negative view is indeed along expected lines from a person who has gained worldwide fame in discerning herd mentality. And herd mentality if not in the other parts of the world then at least in the US is that of fear, which is forcing people to hold back and not spend like they did in the past. But will that lead to a deflationary depression? Well, we wouldn't hazard a guess on that.

Forget the global financial turmoil, the swine flu epidemic and the drought, India has a much bigger problem in store, namely a looming 'water crisis'. As reported on Bloomberg, satellite data has shown that groundwater is shrinking in some of India's driest areas. Curbing demand for water seems like the most obvious solution but how feasible is that given India's rising population? Huge wastage is not helping matters either. And what is more, three-quarters of the country's rivers, lakes and dams are contaminated by human and agricultural waste and industrial effluent.

So, the big question, we believe, is - If monsoons play erratic and the groundwater is declining, where will India get its water from? It is not that India does not understand the importance of water as the fight between states over distribution of water in the past has proven. But really, this precious resource has to be given its due consideration as is given to oil and stress has to be laid on conservation, reducing wastage and preventing contamination. Is the government up to the task? Looks more unlikely than likely.

Asian stocks traded amidst strength today following the US central bank's announcement yesterday that recession there is easing. This sparked off a rally in US stocks, as the Dow Jones Industrial index closed yesterday amidst strong gains. As for Indian markets, the BSE-Sensex was trading with gains of around 480 points at the time of writing. Realty and metal stocks were leading this rise.

Incidentally, while the Fed was outlining its bullish views on the US economy yesterday, one of the senior members of the US government was sounding some caution. Larry Summers, Director of the National Economic Council has said, "We have a long way to go. The problems were not created in a week or a month or a year and they will not be resolved in a week or a month or a year." Though even Summers believes that the free fall that the US economy was seeing till about an year ago has been contained and that the economy is seeing some sort of stability.

Apart from hospitality, airline companies are the worst sufferers of global pandemics like SARS (severe acute respiratory syndrome) in 2003, and swine flu now. As seen from the chart below, air passenger traffic, which was already weak on the back of an economic slowdown in 2008, has fallen much more on fears of the global spread of the swine flu virus. The impact is also being seen on Indian airline stocks, which have fallen around 6-10% over the past 6 days as the virus has spread fast across the country. Well, this is apart from their own misdoings that have landed their businesses in deep trouble.

Note: The sharp decline in air passenger traffic seen during February-August 2003
was on account of fears of SARS; Source: IATA

04:51  Today's investing mantra
"Obviously the stock market is quite irrational in thus varying its valuation of a company proportionately with the temporary changes in its reported profits. A private business might easily earn twice as much in a boom year as in poor times, but its owner would never think of correspondingly marking up or down the value of his capital investment." - Benjamin Graham
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15 Responses to "Do Lower Taxes Make You Happy?"

srinivasa rao

Aug 15, 2009

Low ratio is due the exemptions given to export income and agriculture.

Other exemtions given to companies like reliance. Which is making highest profits in the country and paying tax only under MAT.

nothing different for Infosys etc.


Rajiv Kumar

Aug 14, 2009

The new Direct Tax Code is indeed revolutionary and it was long overdue. Finally the government has realised or got the sense that by giving leverage to the aam aadmi, the collections will improve and reduce black money. Now the biggest problem that they will have to tackle is the corruption in their own offices due to out-dated rules and regulations, and misuse of power by the babu till the clerk. There is big money here that we are talking about, and if this is also taxed/raided, it will bring a big boost to the economy.


s vasudevan

Aug 14, 2009

There is no logic in comparing us with others provided there is level playing ground. There is no uniformity in Taxes in the manafacturing sector when it comes to market competitiveness and the tax payer is not enjoying any special status or incentive, where as it is the other way round. There should be a system that every citizen should shoulder responsibility for being a citizen in the society. When the haves take care of the have nots, the have not should not act as a vote bank, instead should be more responsible to uplift himself with the previlages given. I am sure that taxes are not collected to give secirity to netas and the netas should not spend tax money to their whimsicals. Lowering and simplifing the Tax structure is good that there is more money left with the tax payers to spend which is an economic activity, however the Exchequer gets its revenue indirectly and the Tax Payer will have the satisfaction of spending more.


Hitesh Bhatia

Aug 13, 2009

You have mentioned that India has poor tax to GDP ratio inspite of the fact that it has the highest tax in the world. It is very disappointing to see that comment as I know for sure that many developed markets and even most developing countries have tax rates much higher than India. I would suggest that you should research properly before making such comments here as the readers would definitely not like to be misled.



Aug 13, 2009

In India, we have the economics of inefficient Government machinery, the economics of Black money and money stashed in Swiss Banks and routed into Indian Stock Market through FII - PN link, we have the economics of huge amount of counterfeit currency in circulation and last but not the least, the economics of vote bank politics in the name of subsidies and freebies the the BPL masses. With somuch of economic forces vying with each other to make ours the most inefficient governance, there is no point in crying only about corruption amongst bureaucracy. We have cases of huge insider trading and stock scams which break our back and tax evasion at all levels of corporate management. Therefore, any attempt to improve Direct tax collection and compliance by tax payers is not going to improve matters, unless we do reaaly care for our country in a collective way which is a far fetched dream.


arvind midha

Aug 13, 2009

Taxes..higher or lower! does not matter much.More important is to know what we get in return of tax paid to govt.There is no social security provided to citizens.Adhoc measures adopted by different govts from time to time are hardly effective.The tax collected from public is lavishly spent by leaders for their personal safety.As per report appearing in some of the newsdailies,approx. Rs. 600 crores are spent on the personal security of 545 persons.If our elected leaders feel they are not safe in public, they should stay back at their houses.Huge amount is spent in air travel,telephone bills, accomodation and the TA & DA of these elected leaders.At present,it is quite difficult to get two time meals by a large number of people.Tax structure is only meaningful if the tax paid is utilised for building up the nation.


Prasad V

Aug 13, 2009

Mr. Sood's analogy is really interesting. I don't know how the GDP is arrived at, but, if we consider GDP is calculated from only the 'accounted' transactions, then yes our economy will be few times what we report today.

Lower taxes are a definitely welcome. Considering the tax paying working class in India is a miniscule % of population, it accounts for only minority % of the exchequer. Common man does get direct benefit from lower taxes at minimum impact to economy.


SS Varadan

Aug 13, 2009

I agree with Yeshwant Ullal. That is If one pays more tax, will the Govt. do a BETTER amenities to people? What is the guarantee? Let us enjoy OUR money. No Issues.
Corruption is to tackled, separately! What is happening to the SWISS bank Accounts? What is happening to Tax Dues from Large Corporates running into Lakhs of Crores?



Aug 13, 2009

If you boil down all the problems India is facing, three major ones come out clear. They are: corruption, corruption, corruption. We have a highly elite cadre of IAS officers heading every conceivable system. Yet even after 60 years , we have dismal services in every field. There is no innovation nor creativity describable anywhere. Govt. is paying more and more money to the bureaucrats, but still corruption has become more rampant. The watch dog institutions are virtually ineffective. Hence, aam admi like us do not jump in joy at any proposals of the Government. We know, whatever is being done, more avenues are being created for making money.



Aug 13, 2009

It seems the govt is now focussing to payback the capitalists. One who might have helped them during their election campaigns or one who is speculating the stock markets. Tax rate is not getting revised at the lower end infact it is getting revised at the upper end & who are the people at the upper end - the upper middle class, the rich & the prosperous. So, who is being helped with such a tax structure. If govt doesn't have money where will it get it to payback the overburden subsidies, help the people who are below poverty line, subsidies that need to be given to the farmers if the drought situation intensifies etc. Our Govt should not work for a particular section of people, it should really concentrate on the masses.

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