For economic recovery, it’s imperative for Modi govt to transfer cash to deprived while taxing capitalists

If the government continues chasing the will-o’-the wisp of seeking to revive the economy by squeezing workers through indirect taxes, then the inflationary process will continue; but it would achieve no economic revival.

Contrast this with an alternative policy. Suppose the government spends a certain amount, say Rs 100, as transfers to the poor. Since the poor more or less consume what they earn, all of it would be spent by them buying goods and services. Assuming for simplicity that the capitalists do not consume anything out of their incomes at the margin, and that their share in output is half, the total demand generated in the economy through the various rounds of expenditure, through the multiplier, will be Rs 200.

This will also generate Rs 200 of additional output of goods and services, without any increase in prices (since unutilized capacity existed in the economy).

By our assumption that the share of profits is half, Rs 100 of this extra output will be the extra profits which, again by our assumption, will be saved. Now, if the government taxes away this extra Rs 100 of profits, then (i) there will be no increase in the fiscal deficit; (ii) there will be no increase in private wealth compared to the initial situation (since extra savings which constitute addition to wealth would have been taxed away), and hence no worsening of wealth distribution; (iii) there will be an improvement in the condition of the workers, both because of the initial transfer and because of larger employment; and (iv) there will be no inflation because of this expansion programme.

Thus, in contrast to the conservative economic policy which unleashed inflation while worsening the state of the workers, and all to no purpose by way of economic recovery, the alternative economic policy that makes transfers to workers by taxing capitalists, achieves a recovery without causing any inflation. And since the tax on capitalists only takes away the extra profits coming their way, they too would be no worse off than in the initial situation.

The absurdity of conservative economic policy is now becoming clear even to capitalists, though not to the Modi government.

(IPA Service)

Views are personal

Courtesy: People’s Democracy