In response to my December 27, 2004 article advocating reduction in taxes, Don Michaels sent a letter, published in THT, making a case for an increase. Let us analyze each of his arguments.

Don’s first contention is that even if taxes are reduced businessmen will not reduce prices. Don is right that when taxes go down, the prices may not immediately go down, but, in general goods are available at a cheaper rate to consumers in a lower taxed nation than in a high one. Isn’t zero or very low taxes the reason that countries like Singapore and Hong Kong boast of the world’s highest per capita trading volumes as well as living standards which are the envy of those of us in the 3rd world?

Further, high prices due to high taxation reduce demand and thus lower economic activity in the country. If Don, you can afford to buy a Toyota RAV 4 for Rs.20 lakhs, you may not, perhaps, be willing to buy it when taxes result in it being priced at Rs.40 lakhs.

Does Don really believe that if duty rates are brought to zero from say 100% prices will stay the same? How can they? Competition amongst sellers ensures that the consumers get their reductions fast.

Second point made by Don is that, “governments use taxes to build infrastructures; without them nations cannot progress”. I do agree with the later part of the sentence. Nepal does need infrastructure, desperately so. However, if anyone thinks that government taxes result automatically in building infrastructure, that person is dreaming.

A committed socialist like Rajiv Gandhi stated that not more than 15% of what government collects is spent on what the collection is for. 85% or more just disappears in funding the government machinery and in corruption. Why not let the private sector do the job? Why not allow foreign and domestic investment to be utilized for building of roads, airports, communication networks, and power plants?

In India when government regarded telephones as infrastructure people had to wait for years to obtain a connection. And if you did manage to get one it was just that one model made by a government factory and had to be black. When a member of India’s Parliament complained about his instrument not working to the Minister, he was told that only the ‘lucky’ few got telephones as India was poor and there were no funds for ‘luxuries’. Now India’s private companies are not only supplying phone connections by the millions each month, but, are also contributing thousands of crores in taxes to the government.

Don your argument regarding infrastructure doesn’t hold water. Tax money is people’s money, if it is not collected by government it would be available for whatever people desire including infrastructure. To allocate resources is the work of capital markets not government bureaucrats and politicians.

Thirdly, Don says, “As for ‘taking’ money from the rich, who is it that creates the wealth of a nation? Is it a CEO in his plush office or the worker on a construction site, factory, mine or farm?” The implication here clearly is that the worker builds wealth, the businessmen contributes nothing.

This contention displays such ignorance of the wealth generating process that all other arguments of Don pale in comparison. How can anyone even think that a worker without capital, or managerial resources, can produce wealth? Far from it.

If workers could produce wealth on their own then Nepal would be as rich as the US. Does Thapa, a porter, in a remote mountain village at Lukla work harder, or, Smith, an elevator operator, in New York’s Waldorf Astoria Hotel? Thapa in Lukla barely survives, Smith in New York with 1% of the effort owns a car, an apartment, and flies for a holiday to Mexico each year. If Thapa in the Himalayas expended the same effort as does Smith, Thapa would surely starve.

Don, productivity and wealth are the result of capital and capital is destroyed by taxes. Businessmen are required, for they bring in this much needed capital; without them, there would be no site on which to construct, no factory, no mine, and no farm except for subsistence hand to mouth agriculture.

The Himalyan Times

Ajay Bajracharya, marketing team leader of an NGO, ‘Smallholder Irrigation Market Initiative’ in Jawalakhel, is disappointed. He, like so many others in Nepal, was hoping that Kerry would become the President of the US. Ajay was opposed to Bush’s reduction of taxes for the wealthiest 2% of the taxpayers in the US.

Ajay felt that Bush favoured the rich. It didn’t matter to him that Kerry is married to a billionaire heiress to the ‘Heinz ketchup’ fortune. Kerry’s promise to increase taxes for those earning over US$2,00,000 a year was enough for Ajay. For him taking money from the rich shows that you are for the poor and the downtrodden. If it could only be that simple!

Many people feel the same and populist governments round the world, with a few notable exceptions, make policies to ‘squeeze’ the rich. India, during Indira Gandhi’s regime, had the dubious distinction of having the highest tax rates in the world. The income tax on the wealthiest was over 90%. This burden when combined with wealth, gift, and death taxes exceeded 100% of the taxpayers income in several instances.

If, as Ajay believes, this is automatically good for the poor, then Mrs. Gandhi would have succeeded in wiping off poverty from the face of India. Exactly the reverse happened. Tax collections did not increase, foreign exchange reserves remained chronically short, and India’s economy stopped growing. Unemployment and poverty became synonymous with India.

What happened? The rich refused to be sitting ducks. They rebelled against their enforced martyrdom at the hands of Mrs. Gandhi’s egalitarian philosophy. They evaded taxes, sent their capital to Swiss banks, or simply stopped working.

Now, lets turn to those countries which either had low taxes to start with or reduced them. They become fabulously rich. 11 of the world’s 16 wealthiest jurisdictions are tax havens. The top five are Bermuda, Luxembourg, Switzerland, Liechtenstein, and the US.

What about the ‘evil’ corporations, should they be made to part with at least 50% of their profits? The case of Ireland is instructive. 20 years ago Ireland was Europe’s shame. Its economy was in shambles; double digit unemployment had become the norm. It was Ireland’s onerous tax policy which was, to a significant extent, responsible for this sorry state of affairs. The corporate tax rate was 50%.

This burden on companies was reduced in the 80’s but in 1991 it was still considerable at 43%. At this point, the Irish leaders showed vision and guts. TAXES, all around were cut.

Over the next 10 years, taxes on companies were slashed drastically. Today the income tax on companies is 12.5%, one of Europe’s lowest. If we buy into Ajay’s argument then these cuts should have made the rich richer and the poor poorer.

Nothing of that sort transpired. The Irish economy went from being ‘the sick man of Europe’ to become a ‘European tiger’. Unemployment dropped by 50%, and investment both foreign and domestic zoomed. The economy in the 90’s showed the highest rate of growth – 7.7% each year – amongst all the developed countries.

The people of Ireland (hope Ajay is reading this) were the biggest winners. The Irish, who were Europe’s poor, now enjoy the second highest standard of living in that continent.

Did the government lose revenue due to these cuts? No. At a 50% rate, corporate taxes raised revenue equal to 1% of GDP. With the rates at 12.5%, the government gets 4% of GDP from the corporate income tax. The ‘evil’ corporations are now bearing a fourfold higher burden as a result of taxes being reduced to a fourth of what they were.

There might be valid reasons for Ajay to support Kerry but increase in taxes should not be one of them. Run away from politicians who promise increased taxes for that’s the way to poverty. Support those who will limit the burden of government not enhance it.

It is for sake of Nepal’s poor that we should cut taxes. The rich will always manage, it is for the disadvantaged that lowering of taxes may mean the difference between living and dying.

The Himalyan Times