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Tuesday, March 08, 2005

Supply Side taxation in India

India swings on the Laffer curve:

The one billion plus people of India constitute the largest democracy in the world, but it also has more people living in poverty than any other country. It has always been so, for centuries at least, but in the last few years it has suddenly broken out of its deep sleep and is now on the move. Its economy is growing at a rapid rate, the Mumbai stock market is performing well, tax revenues are flowing steadily into New Delhi, and the government is now planning to compete with Beijing in contracting for oil supplies to feed India's growing appetite for energy. How did this most unexpected rags-to-riches story come about? One clear reason can be found in a headline in Bloomberg's financial network on 11 January 2005, over a story by Andy Mukherjee writing from Singapore: 'India's Tax Plan May Again Bet on Laffer Curve.'
The article goes on to explain the Laffer Curve (basically the idea that you can increase revenue by cutting taxes) and gives a good history of India's historical tax reforms. It seems obvious to me that, especially for developing countries, high tax margin's on the wealthy dramatically hinder development and entrepreneurial activity. While this is less true in the developed world, or perhaps less criticial is a better phrase, it plays out here as well. Now, simply acknowledging that the Laffer Curve exists, doesn't tell you exactly where the apex is, and I expect that it is in a different place in different economies.


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