Tuesday, May 5, 2009

So Higher Tax rates ...

... are the answer according to the US, UK and other Western Governments? Honestly, the route the world is going down scares me. You only need to look at India as a case study of the perils of this kind of quasi-socialism.
Here's what happened here - high tax rates (effectively 51.75% at their peak I believe) led to large scale tax avoidance and evasion - a practice that remains rampant especially among businesses whose customers buy smaller ticket products and services for cash. We had a ridiculously low number of individual tax payers and it was believed that the Government spent more in collecting tax and chasing down offenders than it collected by way of tax revenue from individuals. Things improved significantly after corporate and individual tax rates reduced to the 30-35% ballpark - where they remain today. Countries contemplating tax increases need to consider the real possibility of the flight of several of their brightest people at a time when they arguably have never needed them more.
Suggestion for a developed country with a reasonably progressive immigration and employment visa policy that is able to offer quality hard and soft infrastructure to global corporations (the UK perhaps?) - reduce tax rates, don't increase them. Will pay off in the medium term with higher revenues in aggregate - from less avoidance as well as from jobs, investment and people moving to that country. Near term effects will likely include a decline in the value of the currency because of higher deficits but the aforementioned movement of people and investment will help strengthen it over time.

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