Should Bill Gates be taxed more than you? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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Should Bill Gates be taxed more than you? 

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In this issue:
» Brent crude is at 47 month low..
» Do Chinese prefer capitalism more than Americans?
» Banks' collateral taken for a ride to protect public interest..
» Has the EM rally fizzled out?
» ...and more!


00:00
 
We are no economists to comment on wealth or income inequality. However, recently one of our team members came across an interesting blog of Bill Gates, founder of Microsoft, where he shared his view on income inequality. Being interesting, the piece was shared with our entire team. And suddenly it sparked of an enriching debate within the team. Suggestions came in from everyone. Some had elements of capitalism in it while a few sounded tad too socialist. One of our members also came out with an ecological solution!

Now since income equality concerns all of us, and could be one of the key factors to stimulate economic growth, the topic is worthy of more debate.

Let us dwell on the problems that income inequality can create. Many would agree that high level of income inequality results in excess wealth concentration. To give you a measure of inequality, you would be surprised to know that currently 10% of the world's population controls 87% of the world's wealth. Such wealth concentration undercuts socialistic ideology of equality for all. It also puts power in the hands of few people while less fortunate ones are left to meet their destiny.

In order to maintain a balance in any society, there is a need to bring in equality. And that can be done by the government. That's because while philanthropy and charity are self driven, government taxes are compulsory.

The most obvious way to being in income equality is to tax the rich a bit more. This is what Warren Buffett too has said in the past. Since the wealthy have diminishing marginal utility of money, many would agree to the proposal. Likewise Bill Gates too in his blog has proposed the same. He has gone a step ahead and suggested progressive taxation on consumption. It means luxuries need to be taxed at a higher rate than necessities.

Do you agree with Bill Gates' recommendation? On a basic level, this does seem to make sense. After all splurging on luxury is not all that necessary and the same money can be used to help the poor? However, dig deeper and you realize that this is not all that simple. What if the manufacturers of luxury products squeeze the supply chain to remain competitive despite high taxes? In this case, it would be back to square one, isn't it? Besides there's also a risk that with taxes on consumption, the poor person can actually end up paying more tax as a percentage of his total income than before? So, while the rich guy will no doubt pay more but even the poor may not be left with more disposable income than before.

Frankly speaking, even we can't think of any foolproof solution to tackle this problem. What we did like was Bill Gates' idea of an estate tax. After all, letting inheritors consume the entire wealth left behind by their forefathers is simply nothing but rewarding someone based on the lottery of birth. And it's certainly not the smartest way to allocate resources. Aside of that, we can't think we can do away income inequality for good no matter what form of taxation we choose to go with.

Do you believe rich people should be taxed more to bring in equality into society? Let us know your comments or share your views in the Equitymaster Club.

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02:15
 
Love it or hate it, there's no better lab of capitalism than the US of A, isn't it? Indeed, America stands for everything that's even remotely free market. No wonder it is called the poster child of capitalism. Therefore our shock and awe is indeed understandable when we read an article about how Americans aren't the biggest believers in free markets. Yes, that's right. As per a survey done by Pew research, the Chinese and Vietnamese are bigger believers in free markets than Americans. As a matter of fact, even India scores higher than the US on this front. Therefore, while 76% and 72% of those who were surveyed in China and India respectively gave a thumbs up to capitalism, the number for the US stood at slightly lower 70%. So, what do you think explains this shift? It has mostly to do with the events over the past few years we believe. While China and India have indeed prospered ever since they opened up their respective economies, US has been in some sort of a decline what with several crisis taking place one after the other. Having said that, the US still remains the hot bed of innovation according to us. As a result, China and India indeed have their work cut out if they have to lift more people out of poverty.

02:40  Chart of the day
 
Emerging markets seem to be losing confidence of the global fund managers. Portfolios are being adjusted in favor of safer options. Exposure to equities is getting cut while cash is getting a bigger share. As per the Bank of America Merrill lynch Survey, global fund managers have cut the exposure to the equities by 5% in just one month. Allocation to equities has come down from 47% overweight to 34% overweight in the month of October. This is the lowest in the last two years. And it is not just the global equity markets. The investors are underweight commodities as well. On the other hand, the cash levels have gone up from 4.6% to 4.9% and dollar seems to be back in favor. The risk aversion reflects the global fund managers' concerns over the end of central bank stimulus. The lack of confidence suggests that how slippery the economic recovery can be when Governments start focusing on quick fixes such as money printing rather than long term solution for the economic mess.

For the first time in four months, the fund managers are 5% underweight on emerging market equities in October 2014. This compares from 14% overweight last month. However, as an article in Mint suggests, the survey is usually a contrarian indicator. Higher cash levels could fuel the next risk taking stint. Hence, we may see fund managers moving back to emerging market equities and commodities. And while India being relatively better placed than its emerging peers may find favor, the upside could be limited keeping in mind the gains markets have seen so far. On the other hand, higher exposure to foreign money will make economy and investors highly vulnerable if reforms fail to materialize soon.

Has the emerging market rally come to an end?


03:15
 
The slippery oil prices have lent a good degree of comfort to Indian policy makers. After all, besides cooling down inflation, India's current account deficit is also getting bridged. It is therefore quite natural for investors to speculate as to how long will the good times last? More importantly what are the chances that the oil prices will resolve India's inflation problem for good? And therefore allow the RBI to curb interest rates. Now, oil prices have seen the biggest drop in more than two years. This is seen as mounting evidence of slackening demand and pricing pressure due to high US shale output. The situation is so bad that it has left traders struggling to peg a floor for crude prices. However, if commodity guru Jim Rogers is to be believed, some of oil price decline is artificial. It is well known that OPEC cartel artificially controls oil prices. And according to him, it is no different this time! According to Rogers, the OPEC is trying to drive down crude prices to give Shale producers some stiff competition. And if this continues, share producers will not be able to keep up their output. This is because shale is high cost oil with some very short lived wells. Thus, India can enjoy as long as the tussle between crude and shale gas continues. However, it would be wrong to assume that the fall in crude prices will continue for long.

03:45
 
When public and private interests clash, whose interests should be prioritized? One such situation emerged recently in the sugar industry of Uttar Pradesh. As per an article in Livemint, the Supreme Court rejected an appeal against an Allahabad high court order directing sugar mills to sell stocks to repay cane farmers. For banks that have lent to the sugar mills, the sugar stocks were the collateral. Banks had appealed that they had the first charge over sugar stocks. Hence, they should be used to repay loans taken by the sugar mills. But the court order has impinged the banks' right by putting the rights of the cane farmers before them. The court maintained that the cane farmer's to life was more important than the bank's right to carry on business. Well, this is a fairly humane approach and we wouldn't contest its validity. The lesson here is for the banks. They must be very cautious while lending to politically sensitive industries.

04:15
 
In the meanwhile, the Indian stock markets slipped deeper in the red. At the time of writing, BSE-Sensex was trading lower by 89 points (0.9%). Most of the sectoral indices were trading in the red with consumer durable and power stocks being the major losers. FMCG and pharma were among the few stocks trading positive. Barring Indonesia, all Asian stock markets were trading in the red with Japan and Singapore being among major losers. The European markets have opened the day on a mixed note.

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15 Responses to "Should Bill Gates be taxed more than you?"

UMESH KUMAR WADHWA

Oct 20, 2014

Taxing rich people is not a long term solution. The goverment should encourage the rich people to encourage the poor people to grow and increase their wealth by upliftment of the poor by sponsoring education to worthy students, supporting in the way of investments and partnerships for new generation of enterprenaurs etc etc..........

Like 

Jyoti Kumar

Oct 18, 2014

Why should there be equality in the first place...will bringing equality in a class by making the brilliant work harder to get their ranks make the dull students any better...

In a way of speaking it is inequality that is the driving force behind all matters..

Like 

G THULESSIRAMAN

Oct 18, 2014

Income Tax rules are different for different countries.
A country like India with more than 1 billion plus population , the taxation system is to be reviewed totally. For instance we can introduce only one Tax known as "Transaction Tax"- modalities of implementation to be debated thoroughly. If we implement properly, we can abolish all the taxes including Income Tax. Higher value of the transaction higher the tax. I feel the Government revenue will improve multifold also we are simplifying the Tax structure

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KD

Oct 18, 2014

I think we should go back to the India of 1980s when rich people were taxed at 90%. In 1980s there was scarcity for everything. If you want to get telephone connection then wait for 6 years. If you want gas station then wait for 15 years or have some political connections. Getting an loan from bank without political connections was impossible.

Businesspersons were considered evil, profit seeking animals. Their children were denied admission to convent schools. In 1980s, instead of doing R&D, businessmen were spending 99% of their time in entertaining politicians.

No doubt, huge amount of businesspersons in India still hold US passport.

Like 

Pankaj Varma

Oct 18, 2014

The objective for the any govt is to maximize innovation and entrepreneurship and motivation while at the same time raise resources for govt spending. There is no need to be just or equitable, the only requirement is that people should not feel overburdened and should not think that that they are being unfairly treated. To that extent the tax laws in most countries are OK. In India the need is only to simplify the tax laws so that people should not feel cheated by the taxman and the CA.

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vinod kumar

Oct 17, 2014

no i do not agree --it is a proven fact that any uneaqual dispensation (might look equitable in the short run) has long range harmful effect on society --even the so called socialistic view of Taxing the Rich more .

Like 

Kalyan

Oct 17, 2014

If we look at the principle of "effort and results need to be rewarded" then taxing some one earning a higher income is out of place. That said I like the idea that wealth that is "transferred" from one person or entity to the other should be taxed and this should be a progressive taxation. This is a better option than consumption tax as higher consumption somewhere leads to money rotating in the market leading to income.

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Nayan Desai

Oct 17, 2014

Higher Tax on higher income will still be viewed negatively by many. The assumption that higher income leads to diminishing marginal utility of money, does not justify paying higher tax, though wealthy may be willing to pay more for his own luxuries. The taxation system, on the contrary motivates people to find ways of evasion. This leads to inequality of wealth in hands of few. I guess, if we can devise a mechanism where people are discouraged to evade taxes, most will be willing to share pie of their income. As for corporate we have CSR, we can have progressive slab of % for contribution to funds like Govt sponsored and managed by eminent people of the society for socioeconomic projects. This will lesson burden on govt budgetary allocation for such activities and encourage wealthy to contribute willingly. Besides the effluent lot of the society will have avenues for contributing their time and effort for constructive activities.

Like 

S.C.Sannyasi

Oct 17, 2014

No, let Govt tax equally and allow more disposable income to
everybody. Rich people earning more will invest more which
bring benefit ultimately to the poor.

Like 

R.Kothandaraman

Oct 17, 2014

yes I agree with the statement of richer should pay more tax.

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