Need to be careful about raising tax rates, says Rajan

Pitching for an environment that encourages innovation, Chief Economic Advisor Raghuram Rajan on Friday cautioned against increasing the margin of taxes, including on the rich, and advocated the need to broaden the tax base?to garner more revenue.

“We have to be a careful about raising the margin of taxes too high and remove the incentive to innovate. An environment encouraging innovation is extremely important now. But we can have a broader base to increase resources,” Rajan said.

Rajan said innovation and technology have changed the ways of working and have?led to the creation of a new set of jobs, including in analytics. He received support from ADB’s newly-elected president Takehiko Nakao, who echoed similar views.

Referring to the rising inequality, Rajan said it is better to bring out measures to give more opportunities for the youth and poor rather than imposing enormous taxes on the rich and discourage investments as well as generation of jobs.

On discouraging subsidies, he said it makes sense to price some of the public goods such as water and power. “Even the poor won’t mind paying for regular supply of water instead of not paying for it, standing in long queues waiting for water supply,” he said.

Citing the fall in demand in Western markets, he said many Asian countries, including India, are finding it difficult to shift from an export-led model to one that is led by domestic demand.

Rajan said many emerging?economies are trying to stimulate domestic demand following the slowdown in developed countries, but sometimes too much stimulus can lead to problems such as over-heating of markets, credit booms and busts. Asian countries should have sound macro-economic policies to prevent booms and busts, he said.

Rajan also said Asian countries should put an end to regional conflicts as it will hurt economic growth and instead focus on regional cooperation. ?

Turning to environment and labour standards, he said though developing countries such as India should do more on that front, it should be done only at a comfortable pace. However, he added that India has to be wary about imposition of environmental and labour taxes. “We (India) need to work on our labour laws to make it more business-friendly, while simultaneously protecting our work force,” he said.