Video Producer: Shohini Bose
Video Editor: Purnendu Pritam
Cameraperson: Shiv Kumar Maurya
Professor Arthur Laffer is a renowned American supply-side economist with Yale, Stanford, Ronald Reagan and Donald Trump on his resume. While he may not have invented the popular theory that “tax revenues could rise if rates are cut”, legend and serendipity have given him the credit and labelled it as the Laffer Curve.
WHAT'S COOKING BETWEEN AAMCHI MUMBAI AND LAFFER CURVE?
On 26 August 2020, the rulers of Mumbai did what few statist Indian governments do – they hacked the stamp duty on property transfers to kick life into the COVID-dead real estate market. The 5 percent rate was brutally trimmed to 2 percent until 31 December 2020. The impact was magical:
- Home sales in Mumbai jumped by 67 percent – November 2020 vs November 2019. It was the highest number for November in the last nine years!
- Come December, and stamp/registration revenues shot up nearly 60 percent over last year – from Rs 2,700 crore to Rs 4,300 crore.
- The total number of registered documents leapt by – hold your breath – 92 percent.
UNION BUDGET 2021: MOST IMPORTANT ONE IN HUNDRED YEARS
This stunning vindication of the Laffer Curve in Mumbai’s property market has a sharp lesson for FM Nirmala Sitharaman who is all over television asking for adventurous ideas because, “this union budget is going to be the most important one in 100 years”. But the ideas she seems to be getting are more of the “same, same”:
- Increase/slap surcharge on the super-rich and long-term capital gains taxes (please resist!)
- Hike customs duties to give greater atmanirbharta (protective self-reliance) to the Indian industry
- enhance outlays on healthcare and infrastructure, and
- sell a few more public sector shares, etc.
DEAR FM, IT'S TIME TO CUT TAXES!
No, this is too trite, tried, tested, and tired. Now is the time to think out of the box – It’s time to cut taxes. With the economy contracting 8 percent now but bouncing 10 percent next year, FY 21-22, the next year, could be identical to FY 19-20. So let’s drill down into the previous year:
- The central government collected nearly Rs 20 lakh crore in corporate, personal income, GST, and excise taxes that year. After handing over approximately Rs 6.50 lakh crore to the states, the Center kept Rs 13.50 lakh crore with itself.
Just like the Maharashtra government cut stamp duties by 60 percent, what if the central government were to announce a one-time/one-year tax cut of 50 percent in FY 21-22, that is, theoretically giving a demand stimulus of Rs 6.75 lakh crore, or about 3 percent of the GDP?
- Everything, from houses to cars to alcohol to apparel to gym equipment to whatever would become significantly cheaper – the demand booster could add an extra Rs 10-20 lakh crore to economic output, benchmarked to how Mumbai’s property market reacted to the duty cuts.
- Such a huge demand jump would inevitably add Rs 1-2 lakh crore in additional taxes for the central government as the Laffer Curve kicks in on the extraordinary spike in private consumption expenditure. So, the additional fiscal deficit, which our conventional policy makers dread, could drop from the “heretical” 3 percent to the far more acceptable 1-2 percent of the GDP.
To conclude: Dear Finance Minister Sitharaman, this is the time to shed convention, dogma, fear, and stasis. Yes, I’ve exaggerated the impact, but the principles are inviolable. If 50 percent is a tad too heretical for you, jump-start with a 33 percent slash. If you want to hedge your bet, try it for a limited six-month window (a la the loan moratorium), not the whole year. But do go ahead, surprise and delight yourself!