Regressive economic system

Dr Santosh Kumar Mohapatra*

         We are living through an unprecedented moment of multiple crises. The Collins Dictionary’s word of the year for 2022 is “permacrisis”. Permacrisis means an extended period of instability and insecurity, especially one resulting from a series of catastrophic events. The recent permacrisis was due to the Covid-19 pandemic, geopolitical factors like the Russia-Ukraine war, higher inflation, and crises in food and energy, cost-of-living crises, trade wars, capital outflows from emerging markets, pervasive social unrest, and the specter of nuclear warfare.

       The World Bank says that 2022 has been a year of uncertainty. The United Nations HDI 2021-22 report states the uncertainties in the world have reached unprecedented levels and that insecurities have exceeded beyond the Great Depression and World War times. The latest edition of the WEF’s Global Risks Report says the return to a “new normal” following the COVID-19 pandemic was quickly disrupted by some of the above-mentioned problems triggering a crisis that decades of progress had sought to solve.

But what is an inhuman, heartless thing is that due to our falling and regressive economic system, extreme wealth and extreme poverty have increased simultaneously for the first time in 25 years. The World Bank says we are likely seeing the biggest increase in global inequality and poverty since World War -11.

     This is further corroborated by Oxfam’s “Survival of the Richest” report. The report points out a paradoxical situation when ordinary people are making daily sacrifices on essentials like food, the super-rich has outdone even their wildest dreams. Just two years in, this decade is shaping up to be the best yet for billionaires —a roaring ‘20s boom for the world’s richest,”.

    Not just  because of Oxfam’s report but by experience, we can agree now that inequality is out-of-hand. Studies in country after country identified similar trends. According to World Inequality Report 2022, India is among the most unequal countries in the world, with rising poverty and an ‘affluent elite. In reality, India has virtually become a nation of rich and corporate behemoths.

         Some attribute escalating inequality to our outdated regressive tax system while others say economic growth rewards those who are more talented and more entrepreneurial. I disagree with the above views. Yes, our tax system is regressive- where the poor pay more than the rich as proportionate of income, but it is not outdated but updated and rigged every time to help the rich, corporates  to pay lower taxes or evade taxes and hide black money in tax havens.

          Similarly, growth does not benefit talented, efficient, genuine entrepreneurs but who are big manipulators and insensitive and unethical. In US, the 25 richest Americans, including Jeff Bezos, Warren Buffett and Elon Musk, paid a “true tax rate” of just 3.4 percent between 2014 and 2018. By contrast the average working family pays an average tax rate of 13 percent.

 Adani’s wealth increased 46 percent last year when net income declined and price-earnings ratio is too high. As on September 2022, The P/E ratio of the company has now soared to 504.3, which is mind-boggling. It simply represents how much money investors are willing to pay per rupee of earnings. In fact, the company’s net income has declined at a yearly rate of 4.7 percent over the last 5 years. Adani Group is ‘deeply overleveraged’, and may spiral into a debt trap, and default.

     Oxfam advocates taxing the super-rich and big corporations as the door out of today’s overlapping crises. It’s time we demolish the convenient myth that tax cuts for the richest result in their wealth somehow ‘trickling down’ to everyone else. Forty years of tax cuts for the super-rich have shown that a rising tide doesn’t lift all ships —just the superyachts.”

   However , taxing the super-rich  is antagonistic to protagonists of market economy and  the Laffer Curve theory which  underpins supply-side economics, Reaganomics, and the Tea Party’s economic policies. The Laffer Curve is an economic theory that describes the potential impacts of tax cuts on government spending, revenue, and long-term growth. However, governments should not be concerned about the economic consequences of higher taxes on the rich as various types of research have contradicted Laffer Curve theory. Even IMF has advocated a solidarity tax. On April 7, 2021, IMF proposed a temporary ‘solidarity’ tax on pandemic winners to reduce social inequalities that have been exacerbated by the economic and health crisis of the past year.

         Actually, keeping taxes low for the rich does not boost the economy.  According to new research by the London School of Economics ( LSE) and King’s College London, the economic case for keeping taxes on the rich low is weak. Reducing taxes on the rich lead to higher income inequality but does not have any significant effect on economic growth or unemployment.  The paper, published by LSE’s International Inequalities Institute, uses data from 18 OECD countries, including the UK and the US, over the last five decades.

         The results also show that economic performance, as measured by real GDP per capita and the unemployment rate, is not significantly affected by major tax cuts for the rich. The findings on the effects of growth and unemployment provide evidence against supply-side theories that suggest lower taxes on the rich will induce labour supply responses from high-income individuals (more hours of work, more effort, etc.) that boost economic activity.  Major tax cuts for the rich since the 1980s have increased income inequality, with all the problems that bring, without any offsetting gains in economic performance.

       Further, a study by the Delhi School of Economics ( DSE) has found that the wealthier a household, the lesser, the income reported by it relative to its wealth. So the rich are not likely to report their true income to evade taxes. They will use tax havens to hide income and wealth. In this circumstances, wealth and inheritance tax is indispensable.

       The inability to tax high net-worth individual corporates according to their capacity — in turn means that the government has turned to rely more and more on indirect taxation and borrowings. This is much more regressive and puts the burden of raising fiscal resources onto the common people. In India, the share of direct taxes in total tax revenues has fallen while the indirect tax has increased.

       For example, nearly 64 percent of the total Rs 14.83 lakh crore in GST was obtained via the bottom 50 percent of the population in 2021-22, 33 percent of GST was obtained through the middle 40 percent, and only 3 percent of GST from the top 10 percent. The Centre earned nearly Rs 8.02 lakh crore from taxes on petrol and diesel during the last three fiscal years, of which more than Rs 3.71 lakh crore was collected in 2020-21 alone. Those have curbed purchasing power of people, living standards, and spurred inflation.

Similarly. due to huge borrowing, the government has to cut welfare expenditures, privatize public sector so as to repay debt and interest. However, whatever method is adopted to tax the rich will not be fructified unless the regressive system is changed. Those who will make laws to tax the rich are beneficiaries of this unjust system. Many legislators have criminal backgrounds and are crorepatis and collect funds from corporates for electoral funding. Already crony capitalism ruling the roost. This is clearly evident from crores of tax revenues locked in dispute; huge loans written off affecting savers; the corporate tax being cut, rich hiding their black money in tax havens as seen in pandora and Panama papers. Hence effort should be made to change our regressive economic system. Further, efforts should not be only to tax the rich but to elevate the standards of living of the masses by creating more jobs, curbing price rises, and stopping privatisation of public sectors and essential services including health, and education.

(*The author is an Odisha-based eminent columnist/economist and social thinker. He can be reached through e-mail at [email protected] )

DISCLAIMER: The views expressed in the article are solely those of the author and do not in any way represent the views of Sambad English.