Charity is a cold grey loveless thing.
If a rich man wants to help the poor,
he should pay his taxes gladly,
not dole out money at a whim.
Clement Attlee, Former British Prime Minister
Which affidavits? The ones candidates and political parties in the forthcoming general election will swear before we shortlist them as worthy of our votes. We’ve seen how irresponsible income and corporate tax cuts implemented since 2006 have extensively damaged the economy and the social fabric under three different PMs. While Navin Ramgoolam’s position on taxes during the past five years has oscillated between lowering them further to 13% for women and not raising them should he return to power. This is kind of worrying because it is the most urgent and important thing to do to avoid a significant degradation of an atmosphere that’s already pretty bad. So until we have recall elections and statute referendums we need affidavits and debates on their contents. Because politicians put something in their manifestos and then do the exact opposite.
Let’s fact-check some of the things that have been thrown at us to justify the implementation and the maintenance of such regressive policies and look at some related issues.
1. We experienced triple external shocks (TES) in 2005 and Sithanen’s response was to lower top tax rates for corporates and individuals. This was supposed to generate 8% growth rates (growth rates are an important component of social contracts aka projet de société along with how the baked cakes are distributed).
But as chart 1 shows we never got close to this target in any of the last 13 years (the distribution not shown here has also been the most unfair we’ve seen in at least 27 years). So it has failed completely. It should be scrapped and tax brackets should be added back at least to 35% next week because the cost of maintaining this losing policy has been enormous and will only worsen.
We could have avoided this disaster if we had looked at how the Reagan and Bush Sr. tax cuts in the 1980s had not generated the higher growth rates Laffer had promised but ended up increasing US public debt by 2.6X and 4X over eight and twelve years. In fact the only three times in the last 42 years that we’ve clipped rates of 8% or higher happened under a regime of progressive taxation. Plus as was demonstrated back in June 2006 before Sithanen started screwing up the economy really badly the TES are fallacious arguments. Ramgoolam was briefed end of April of that year that the guy was misreading the situation but either the then PM didn’t understand or he didn’t give two hoots which is as bad.
2. The flat tax has made us resilient because we were not hit hard by the 18-month Great Recession (GR). Untrue. We didn’t suffer that much from the GR because our banks didn’t have the kind of exposure to toxic assets as their American, British and Icelandic counterparts. Besides in 2008 the Rs5.8bn combined profit that MCB and SBM bagged were at the time record profits. Not exactly what you would call a financial crisis or a collapsing banking system.
Speaking of resilience, it is interesting to consider three episodes after which our economy did rebound (see chart 2). The first one is Claudette which smashed us into a depression (a deep recession) as from the last week of 1979 and wiped out two years of economic progress. Although real GDP collapsed by more than 10% we rebounded the following year with a 5.3% growth. The second is how a lack of planning caused a ‘drought’ to halve growth to 2.6% in 1999 before the economy surged ahead the following year with a growth rate exceeding 8% for the last time – now we don’t even have a ministry of plan and it shows. The third and final episode is when the textile industry rebounded after shedding about twenty thousand jobs in two short years. It is important to note that all three cases happened under a regime of progressive taxation. This is kind of obvious as we know that our welfare state keeps about one-third of us out of poverty and is therefore a very important source of resilience that our progressive taxation system used to make sustainable. Passionately tamper with progressive taxation like Sithanen did and you can kiss resilience goodbye
3. We’ll get the promised 8% growth rates once the Great Recession ends. This didn’t happen either. As chart 3 illustrates it’s been 10 years since the GR ended and still no trace of average 8% growth. In fact we’ve had eight consecutive years of growth below 4% or half the target. That’s basically an L-shaped growth recession by our standards and at our stage of development. But this was expected after Sithanen killed savings (he’s now worried about low savings), broke the economy, created serious structural problems (he’s been worried about that for ages), hatched double-digit inflation, depreciated our rupee, crafted a controversial stimulus package and created massive inequality (guess what? that’s another of his worries). And because his successors stuck with these trickle-down policies. Please note that we haven’t even spoken about the controversial hire-fire laws and the elimination of the TCSB.
4. Increasing income and corporate taxes will reduce growth. It won’t. On the contrary this will help put the right dynamics back in place especially if they are accompanied by adding progressiveness in the VAT structure. They will for example help prevent Fond du Sac from getting flooded for a fourth consecutive year and hopefully get rid of the rodents in one school there. It’s good to note that in January the suggestion of newly-minted US congresswoman Alexandria Ocasio-Cortez (AOC) to tax annual incomes higher than USD10 million in America at 70% was raised in Davos – they are currently at 37% – and Michael Dell of Dell Technologies responded that he’s more comfortable giving money to his foundation than giving it to government through taxes and that higher tax rates would not help growth. Prompted to explain his point he challenged the moderator to name just one country where taxes this high had ever helped growth. The answer came instantly from fellow panelist MIT’s Erik Brynjolfsson: the United States! He mentioned that between about the 1930s to the 1960s the average tax rate was 70% with a peak of 95% and that these were good years for American economic growth. He could have used Mauritius and Scandinavia too.
Similar fears were raised in 1992 when Bill Clinton campaigned to increase taxes on the rich to reduce the deficit and get out of the growth slump that trickle-down economics had dumped the US economy in. Clinton raised taxes and ended up presiding over the longest economic expansion in US history with a 3.8% average growth – same as ours for last ten years but theirs is in US$. You don’t want to compute ours in USD especially not in the first quarter of 2015. Unless you want to feel depressed. What you want check instead is the tax rates in OECD countries. It’s also quite an irony for Ramgoolam to have borrowed the ‘Putting People First’ slogan from the Clinton 1992 campaign playbook in 2005 and then to sponsor very regressive tax cuts which have thrown us into a growth recession.
Stay tuned for Part 2.