Column: Focus on GST and DTC first
Interestingly, the call for a new peak rate has come at a time when the US Congress has recently decided to raise taxes for the ‘super-rich’ Americans (individuals and couples earning more than $400,000 and $450,000 per annum, respectively) to tide over the fiscal cliff. In September last year, France’s President François Hollande announced a 75% tax for the super-rich and higher levies on business to reduce its fiscal deficit to 3% in 2013. Rangarajan has perhaps taken a cue from such policy responses and has suggested a similar path for India to partly address India’s fiscal woes.
While there is little disagreement about the need for focusing on revenue-augmenting policies, the proposal of taxing the super-rich requires the following consideration.
First, the proposal implies that we are operating at a point below the revenue-maximising point on the Laffer curve. Research by economists such as Martin Feldstein suggests that this may not be necessarily bad. As tax rate rises, the ‘deadweight loss’ to the economy rises, so that as the rate gets close to the revenue-maximising point, the loss to the economy exceeds the gain in revenue. Therefore, policymakers should strive to set tax rates at
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