Fifty years of tax cuts for the rich didn’t trickle down, reported Bloomberg (December 16, 2020), quoting a study. Using the sophisticated statistical methodology, and looking at the economic policies being pursued by 18 advanced economies, two researchers at the King’s College in London found what most people had always argued, but obviously without much empirical evidence.
The evidence is there now. While there have been efforts by several Indian economists also to justify the need for corporate tax cuts, this study (and a few others) conclusively show that neither did the tax concession help in increasing growth nor did it provide for more employment opportunities. It only helped widen the existing wealth inequality by providing easy money into the pockets of the super-rich. If it hasn’t worked in rich economies, wonder how the tax concessions have led to growth in developing economies.
In India, where a debate rages over the ‘revdi culture’ with most newspaper articles slamming the freebies being doled out to the poor, including farmers, the issue of mammoth freebies to the corporate — nothing less than offerings of “milk cake” to the rich is being brushed under the carpet. Except for a mere mention by some commentators, the extent and nature of corporate subsidies, including write-offs, tax holidays, stimulus packages, haircuts etc have been simply glossed over.
Although the Reserve Bank of India (RBI) hasn’t defined what it means by saying “non-merit” freebies, surely global studies tell us that corporate tax cuts in India too would probably fall in that category. In an interview, Jeffrey Sachs, a distinguished economist from Columbia University, was once asked what happens to the massive tax cuts when it doesn’t result in any increase in industrial output or creates additional employment; his short answer was that the money saved from tax concessions goes into the pocket of the top company executives.
Let us first look at how central banks of some major economies print surplus money that goes literally into the pockets of the super rich. ‘Quantitative easing’ as it is called in economic terms, ever since the days of the global economic meltdown in 2008-09, rich countries have printed $25 trillion of surplus money, which by way of federal bonds issued at a low interest rate, which averaged less than 2 per cent for quite some time, is made available to the rich. This money is invested in the stock markets in emerging economies, and we see the bull markets on a run. With recent hike in interest rates already causing turbulence, further tightening of Fed policy expecting rates to climb to 4 per cent, it looks the free ride the stock markets enjoyed will come in for much-needed course correction.
In an article, Ruchir Sharma of Morgan Stanley had explained how $9 trillion of surplus money printed during the pandemic years, with the aim to infuse stimulus into the ravaged economies, went instead into the pockets of the super-rich via the stock markets. This staggering amount by all accounts is a freebie.
In India, an economic stimulus of
Rs 1.8 lakh crore in three tranches was made available to the industry in 2008-09 when the global economy was in turmoil. This package should normally have been withdrawn after a year or so. But according to a news report, someone ‘forgot to close the tap’ as a result of which the stimulus continued. In other words, the industry got an economic stimulus of approximately Rs 18 lakh crore in the 10 year period. Instead, if this amount was made available for agriculture, it could have provided farmers with an additional direct income support of Rs 18,000 per annum under the PM Kisan scheme.
Then there was the category of ‘revenue foregone’ in earlier budget documents. Prasanna Mohanty, in his book An Unkept Promise: What Derailed the Indian Economy (2022), has clearly explained how a positive spin was given by dividing ‘conditional’ and ‘unconditional’ indirect taxes. As a result, tax benefits of more than Rs 5 lakh crore in 2014-15 subsequently were visibly squeezed to Rs 1 lakh crore. To hide the massive tax exemptions and concessions, the term ‘revenue foregone’ was also replaced with a new head ‘revenue impact of tax incentives’.
In September 2019, another tax cut of Rs 1.45-lakh crore was given to the industry. This was at a time when most economists were asking for an economic stimulus to boost rural demand.
While farm loan waivers totaling Rs 2.53 lakh crore have been blamed for disrupting the credit culture, a faulty narrative considers that massive corporate write-offs lead to economic growth. Rs 10 lakh crore of corporate bad loans have been written off in the past five years, Parliament was recently informed. Unlike farm loan waivers, where the banks get back the outstanding amount from state governments, in case of corporate write-offs, the banks take a hit. Further, there are over 10,000 wilful defaulters who have the capacity to pay but don’t. A few months back, the Punjab Government had withdrawn arrest warrants against 2,000 farmers for defaulting on their loans; wonder why wilful defaulters go scot-free.
In addition, the huge haircut that banks and other lenders have to suffer in IBC (Insolvency and Bankruptcy Code) resolutions is actually seen as a legal route to siphon off public money. In 2021-22, haircuts averaged 90 per cent.
The erstwhile Planning Commission had in a working paper on subsidies pointed to a subsidy of Re 1 per acre for the 15 acres of land that Apollo Hospital in New Delhi received. Private hospitals, schools, and industries, including the IT sector, have often been given land at Re 1 per square metre. Similarly, there have been subsidies for infrastructure, interest, capital, and exports, besides ensuring electricity, water and precious natural resources. Add to it the numerous ‘incentives’ that many states provide to the industries, including 100 percent income tax exemption, and SGST exemption; it will be interesting to study how corporate India too thrives on huge subsidies, and of course freebies. This eats away much of the resources, leaving only revdis for the poor.
