When Government Inaction Cripples Economic Activity

Posted by: on Jun 9, 2012 | No Comments

It is a known fact that demand and supply decide the direction of a free market economy. However, it is the government that creates an atmosphere where market forces can operate without any fear for their investment.

Zero Tolerance for Corruption

Posted by: on Dec 16, 2011 | 4 Comments

The number 1 topic of discussion these days is corruption. Will putting people in jail solve the problem? Is it even the right thing to do? NO.

Is a Free Economy a Fair Economy?

Posted by: on Oct 19, 2011 | No Comments

The United States of America has emerged an economic superpower during the last couple of decades primarily because of its liberal trade policies. The world’s biggest ‘free trade’ zone was created with the removal of restrictions on

Shutting Down Sweat Shops isn’t Going to Help!!

Posted by: on Oct 7, 2011 | No Comments

One of the oldest and perhaps the most misguided myths about capitalism is the notion that businesses and factories exploit the poor. Among the various anti-capitalist propagandas being touted by the Marxists, one of the most striking is the sad image of

In the Name of Capitalism: All’s Not Well!!

Posted by: on Sep 28, 2011 | 2 Comments

Sarah Palin’s speech earlier this month in Indianola, Iowa tore apart Washington’s political fraternity. While it may have left her presidential aspirations in a dicey situation, her speech attacked government officials and politicos who are getting wealthy

David and Goliath

Posted by: on Aug 20, 2006 | One Comment

What is common to Estonia and China? Estonia is in Europe, China is in Asia. Estonia is just a dot on the map, in China you could fit 212 Estonias. Estonia’s population of 1.5 million is 6.5% of Nepal’s. China has 1.3 billion people, 56 times that of Nepal. Estonia is a

13% – Russia’s tax on income

Posted by: on Aug 15, 2006 | No Comments

America is a haven for capitalists while Russia is a workers paradise. US glorifies profits, Russia vilifies it. This was the conventional wisdom. It has been turned on its head. Bush fought a bruising battle in the US Congress to marginally reduce taxes. Vladimir Putin, the Russian President, did it with ease.

Jan 1, 2001 was the beginning of a new era in Russia. Russians woke up to a flat 13 percent income tax. It was a watershed event. That’s right; it is Russia that we are talking about, not Hong Kong or Singapore. The USSR was founded on the principle that all businessmen were evil and profits were passe – a bourgeois concept.

Now, businessmen can retain 87 percent of what they earn in the land of Lenin! This is something which I would not have dreamed of 10 years ago. Truth is stranger than fiction.

What is surprising is that Russia had just three tax rates of 12, 20 and 30 percent prior to this reduction. The rates were high but comparable with what most countries charge, and, yet, Putin chopped them.

What has been the result of this relatively low tax rate? It has been an unprecedented success for Russia. It has contributed to Russia’s stability which was so lacking in the aftermath of the collapse of communism. The benefits to the Russian economy grow by the day.

Capital flight has stopped and foreign investors have started returning to Russia. This, inspite of the huge losses incurred by the dollar investors resulting from a complete collapse of the ruble in the 1990’s.

Hoover Institution scholar Alvin Rabushka observed in a February 21, 2002 analysis for www.russiaeconomy.org, “the 13 percent flat tax has exceeded the expectations of the government in terms of revenue. For the vast majority of taxpayers, its implementation is simple, and no forms need to be filed.” Adjusting for currency fluctuations, Rabushka adds, “real ruble revenues increased about 28 percent.”

This novel experiment is paying huge dividends for the Russian government by inculcating the habit of paying taxes in people who were used to a culture of evasion. This changed attitude was to be expected; after all, evasion too comes at a cost – black money is difficult to reinvest in business and peace of mind is lost. People, therefore, do pay up when rates are not extortionate.

Russian tax revenue which barely equaled nine percent of its Gross Domestic Product (GDP) has grown to 16 percent. Russia also grew by 5% in 2001. A win-win situation for all concerned. Taxpayers are smiling, Putin has become a hero of the ‘Union of World’s Taxpayers’, and Russia’s government is busy collecting a windfall.

The US meanwhile has six tax rates from 10 to a high of 38.6 percent. Its 46,900-page Tax Code provides elephant size loopholes to the wealthy while the middle classes pay up. Russians file a simple one page form.

It is estimated that tax accountants will gobble up over 150 billion dollars for the paperwork which accompanies the tax payment in the US. This burden is one of the reasons why the US economy will not average even half the growth rate accomplished by Putin’s Russia.

It is ironic that Russia has a 13 percent flat tax while the bastion of world’s capitalism cannot even bring in a flat 17 percent tax. This is what Steve Forbes, a republican contender for the US presidency, had wanted but could not achieve.

Clearly, Russia has more to do if it wants to prosper. Rule of law, freedom of speech and, especially, far stronger property rights are surely needed. The 13 percent income tax is however a very powerful step in the right direction.

Nepal, to make an impact, must abolish the income tax. To do so would signal to the world’s business community, ‘invest here; Russia may have larger markets but in Nepal you need no tax experts and pay no income tax.’

With the abolition of the income tax, foreign and domestic investment would boom and trade would virtually explode. Any loss in revenue would be more than made up by higher VAT realizations by the government.

The Boss

Freedom and education

Posted by: on Aug 8, 2006 | One Comment

I went to St Columbus’s school in New Delhi in the 1970’s, and enjoyed it. The Irish missionaries who taught there were dedicated and made learning fun.

And yet as good as my school was, I remained uncomfortable with certain aspects of it. I studied science, maths and english by choice. Why was I forced to learn Hindi, Sanskrit and painting?

The government dictated to the school that I learn to write in Hindi, I have never done that again after I left school. I regarded Sanskrit as a waste of time; I have never written, spoken or heard it since I left school. Inspite of a great draw­ing teacher, I never passed that exam or had any inclination to be an artist.

My school’s attempt to make me a linguist and an artist failed. I wondered if there was a better option. A school where you could study and do as you liked. A school where you were not forced by control minded governments and school authorities to learn and do things you had no interest in.

Count Leo Tolstoy spoke about it in 1862.

“What is meant by non-interference of the school in learning? — It means granting students the full freedom to avail themselves of teaching that answers their needs, and that they want, only to the extent that they need and want it; and it means not forcing them to learn what they do not need or want.”

“I doubt, whether the kind of school I am dis­cussing, will become common for another centu­ry. It is not likely that schools based on students’ freedom of choice will be established even a hun­dred years from now.”

Tolstoy was right. It was only a 106 years later, in 1968 that such a school was founded in Framingham, in Massachusetts, USA.

The by-laws of “The Sudbury Valley School’ say, “the purpose for which this corporation is formed is to establish and maintain a school for the edu­cation of members of the community that is founded upon the principle that learning is best fostered by self-motivation, self-regulation, and self-criticism.”

The school starts from Aristotle’s premise stated over 2000 years ago, “hu­man beings are naturally curious”. It al­lows its students to do what they like. If you have no interest in science and would rather fish the whole day, you are allowed to do just that. In fact you may fish for a whole year if you like.

Before you write-off that experiment as unworkable, please understand that the school’s existence after 35 years of its found­ing is a testimonial to its success. It does not get or ask for any financial or other support from the government and competes exceptionally well with ‘free’ schools run by the government.

The students, teachers and parents are all fiercely loyal to the school and swear by it. The school has been written about extensively and is admired by freedom loving people worldwide. Those who pass out are admitted to the best US universities with ease.

It is beyond the scope of this article to explain how the school works. Suffice it to say that it is among the most disciplined in the country. Everyone’s rights are respected.

Yes, you may fish the whole day, but if you de­cide to attend classes you must honour your commitment. If, for example, you fix time with the maths teacher to help you understand a theorem, you must attend and fulfill your promise.

The experience has been that when students want to learn, they do so in double quick time. There are boys and girls completely uninterested in maths until they are 12 years old and then sud­denly get the urge to learn. When that happens, they learn in one year what students in other schools learn in 12 years of schooling.

This country would do well not to straightjacket education under the deadening weight of rules and regulations of a know-it-all bureaucracy. The need of the hour is to let private investment, in­cluding foreign, come into education unhin­dered. Who knows, perhaps then ‘Sudbury’ might be persuaded to open a school in Nepal.

The Himalyan Times

Regulate Less, Save Lives

Posted by: on Jul 17, 2006 | No Comments

It is a fundamental principle of economics that demand for a product increases with a reduction in its price. As regulations are ‘free’, and people who advocate them bear negligible costs, it is virtually guaranteed that demand for government regulations will continue to grow indefinitely.

However, do government regulations really cost us nothing? Is the cost always borne by big corporations and evil businessmen? Businesses may initially bear the costs, but rest assured that they will, as soon as they can, pass on these costs to you and I. How? By an increase in the price of goods that we buy. We as consumers ultimately pay for all government regulations.

Each individual regulation added onto by the government means little to us, and the cost of each may be so infinitesimal, that it is only rational for us to ignore it and concentrate our attention on more pressing matters. The problem is that when the cost of all the regulations imposed on us is added up, it is no longer a small matter.

The only country where an attempt has been made to identify the cost of regulations is the US. The cost borne by its people was estimated at $660 billion in the year 2000. The projected annual cost now for a household of four exceeds $10,000.

Clearly, this level of regulation if imposed on the people of Nepal, would immediately shatter the economy. Imagine if the US regulations, designed to protect buildings against earthquakes in Los Angeles, were made applicable in Kathmandu. All, except the wealthy few, would find themselves gazing at the stars at night instead of a roof.

Even though a rich country can better tolerate regulations, yet it is this regulatory burden – exceeding half of the US federal government’s tax receipts – which has made annual growth rates in America average an anemic two percent.

No one doubts the good intentions of our lawmakers. Regulations are often drafted with thoughts of making our buildings safer, food healthier, water hygienic, air pollution free, aircrafts less likely to have accidents, and labour happy.

The problem is that this plethora of regulations increases the cost of everything we buy and, hence, makes life difficult for the most vulnerable in our society: the poor. They just cannot afford the costly goods.

Theoretically, it is possible to eliminate aircraft crashes by zealous government oversight and regulation. However, the cost of such burdensome regulations would make air-travel so expensive that many more people would die because of the use of road transport, which is far less safe than travel by air.

In Nepal, the best way for government to make domestic air travel safer would, ironically, be by deregulation. Let the government abrogate the monopoly of domestic airlines and permit foreign airlines to compete on domestic routes. This would increase foreign investment, bring in international airlines – with a worldwide reputation to protect – and make flights safer.

Big companies often capture the government agency in charge of regulating by intensive lobbying. They then use regulations as a weapon against their smaller competitors.

In the UK, for example, large businesses wanted an onerous licensing burden to be applied to all food premises. These big companies knew that they would have an easy time complying with these regulations, but their smaller competitors would be forced to close shop.

In the same manner, asking roadside restaurants in Nepal to adhere to standards which are met by Hyatt or Holiday Inn would result in their closure. Commonsense tells us that this is not a desirable outcome.

Likewise, minimum wage laws and other labour legislation cause problems for small businesses. The big companies can pay their staff more than what is required by law and would be happy to see that the small enterprises are forced to do the same. Strict enforcement of wage & labour laws as exist today would lead to the closure of most of the small businesses with unemployment even more widespread than it is now.

We should learn from the example of the developed countries and try to rid ourselves of regulations if we are to banish poverty faster. Deregulating by creating wealth, would save lives. Rich people live longer by about 20 years – that is the difference in life expectancy between those living in the rich and those in poor countries.

The Himalyan Times