Monday, January 5, 2015

Reduce taxes..Re-model QE

In my previous articles I was discussing about that cutting down on taxes and improving the investment and macro economic development is the best strategy rather than opting for austerity measures and government investments. My recent research is hovering above the theory of reducing taxes the boost investment climate compared to traditional QE policies. According to the Keynesian economics lowering taxation rates boost household savings which leads to consumption and further inflation. US economy is currently struggling to get inflation which will reflect that manufacturing & consumption both has started. Today we know that 60% of the US corporate cash reserves lies outside of US and they are reluctant to bring the same back home as taxation rates are high.  John F. Kennedy became president of the United States in 1961 brought Keynesian ideas to discussions of economic policy at the highest level to expand national income by reducing taxes was adopted. The result was outstanding which looked like Growth in real GDP was 5.3 percent in 1964 and 6.0 percent in 1965. The unemployment rate fell from 5.7 percent in 1963 to 5.2 percent in 1964 and then to 4.5 percent in 1965. The history was repeated again in US. When George W. Bush was elected president in 2000, a major element of his platform was a cut in income taxes. Congress passed major tax cuts in 2001 and 2003. After the second tax cut, the weak recovery from the 2001 recession turned into a robust one. Growth in real GDP was 4.4 percent in 2004. The unemployment rate fell from its peak of 6.3 percent in June 2003 to 5.4 percent in December 2004.

This clearly reveals that government austerity and public investments strategies fell short to spook growth as lowering taxation has done. Boosting the household cash reserves is the best way to build confidence among the consumers. Further low taxation pushes up investments. Historically we have seen US have reduced interest rates to push up investments which have worked well but this time it did not turn up since unemployment numbers are still a mystery itself. Hence the best way to do is lower taxes makes goods and services cheap & increase household savings . Further lowering taxation increases entrepreneurship and business investments climates.  I find in my research that time has come when the government should avoid the public participation of investments along with private. Since currently in US and in other economies including India we find that the governments are not the best person to identify the feasibility of infrastructure projects. China and US currently are building infrastructure which is not currently in demand or not required. This pushes up asset bubbles and false economic growth numbers which are unsustainable in the long term further their create glitch over the long term growth of the economy.

The government must understand that private investors are more hungry to get healthy ROI hence their investments road maps are more perfect and not biased with political climates judgments. The world economy needs to understand that investment climates are changing and government 5 years term based investment decision are wrong and burden over the long term economy. Reducing taxes would attract more Research and Development as cost of operating would reduce and business becomes more profitable. The problem with the developed economies is that they don’t want to lower taxes as they want to keep their income levels same as it used to be in the year 2000. If we compare the recent government incomes from the taxation every economy has tried it best to keep the income at the same level. When we all know that QE is a burden on the economic balance sheet why not to twist the QE in the form of Taxation benefits and push up the growth engines of the economy. Why US is not lowering the domestic taxes for the overseas investors who are sitting on a cash pile of more than $2 trillion.

Lowering interest rates would not help as taxation would eat up the profitability higher compared to interest cost. Economic history clearly shows that reducing taxes pushes up growth and recently as its being expected that US economy would raise interest rates well high corporate tax followed with interest increasing –how you plan to start your business in US. Further interest rates should be used as regulator to control the inflation and liquidity. It can be used to push up growth where cost of taxation is high. Investors might be happy to pay interest rather than paying high taxes which eats their immediate profit and growth projection abilities. The US government forgets that it’s a globalised economy and setting manufacturing base and replacing country for starting business is very easy and zero restrictive. Hence before increasing interest rates lower the taxation rates so that business grows. The same is applicable for the Euro-zone that QE should be in taxation form and not injecting liquidity into the system creating bubbles for a long term catastrophic collapse. The developed and developing economies should understand that public participation in projects should be reduced and make it more feasible for private should be prime aim.

The cost borne by the government under these projects should be utilized as taxation incentive to the private to make these projects 100% feasible for the private.  Corruption is another bottle neck which takes birth form the government ends and creates short term useless influence to create assets which will not be required in the recent times. This creates zero ROI based projects and finally private investors run away from these proposals even in times of healthy proposals. We need re-modeling of the QE & government expenditures.


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