Thursday, February 14, 2008

This Economics I can't understand

Come February and Newspapers are full of predictions on Taxes,especially direct taxes in Budget to be presented on 28 Feb. There are wish lists from various organizations requesting Tax sops to particular industry. Leftist would like increased tax on Rich and Tax benefits to Low income groups. This year there is tremendous increase in Tax collection.Advance Income Tax is all time high. This is considered as result of Low Tax regime brought about by our present PM, who was Finance Minister in 1991. Before 91 we were paying very high I.Tax which resulted in Parallel Economy called 'Black Money' which was bigger than official Economy. With reduction in I.Tax rate, increased vigilance and Computerisation, more and more people are declaring their true income. These days it is advantageous to declare Income, Pay Tax and Invest which will recover Tax paid in just 2yrs. Another punitive Tax was Death Duty/Wealth Tax etc. With removal of these taxes,Tax compliance is better and Peoples' savings/spendings have increased which is reflected in booming Economy.
In USA this is Presidential Election year. Now in final phase debates and focus of Candidates will be on Economy which is threatening to go into recession. Some economists fear that it will be similar to great Depression of 1930. Everyone agrees that Americans-both Govt. and Individuals- spend more than their Income and hence run up great deficit which requires periodic recessions to prevent Great Depression of Economy. Many blame Republican Presidents'-Regan & Bush- Tax Cuts and Supply side policies for this.
But this is what I fail to understand. Today US Income Tax starts with 15% at Income level of $0 to $27K. One has to file return for Monthly Income of $750.-for Self Employed $400/Yr..There is no Tax exemption limit like we have (Rs. 100K). The Death Duty has resulted in Failure of many small to medium businesses in US as they were asset rich but cash poor. President Bush has advocated marginal reduction in Income Tax-from 15% to 10% in lowest bracket and removal of Death Duty. Why this is considered as disastrous for US economy but same proposals when applied to Indian Tax laws were considered as boon to economy is beyond my understanding. When I watch Suze Orman show on CNBC-TV18, I find it appalling that people with 4-8K take home pay /month have hardly any savings to fall back on. Savings earn just 3-4% Interest(Taxable) on Deposits ,many have huge credit card debts.They cant pay back debts of $10-15K and have to file Bankruptcy which increases their interest on all loans. For families belonging to sub 100K/yr in earnings life is tough,they have high debts,pay high interest, can hardly save anything and saving fetch so little interest that there is no incentive to save. Govt. collects Tax from these marginal earners and spends huge amount on Iraq misadventures and exploring space. This finally ends up in Periodic recessions in US which has effect on all the economies of the world. What is the solution? Only God Knows as no two economists agree on given solution.

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