Dr. Susmit Kumar, Ph.D.
(A) Let us take some real-life examples:
1. For thousands of years, the Brahmaputra river has been the lifeline for the Bangladesh and North-east India. Nearly the entire catchment area of the river lies in China whereas India and Bangladesh get all the water. Now China has been building dams in the catchment area of this river to divert the flow to its massive desert. As the economies of several Northeastern Indian states and Bangladesh are dependent on the Brahmaputra river, it is certain that India and Bangladesh would take China to an international tribunal to force China to share the water.
2. After the 1964 Nuclear Test, China came up with a (crazy) idea of making a hole in Himalayas by detonating nuclear bombs to suck monsoon rain into to China (I read it when I was in high school during early 1970s in one of India’s news magazines). If they can make a hole in Himalayas to suck monsoon rain, it will make India’s Gangetic plain desert.
3. South China Sea - Chinese claims in the South China Sea are delineated in part by the nine-dash line. It was originally an "eleven-dashed-line," first indicated by the Kuomintang government of the Republic of China in 1947, for its claims to the South China Sea. When the Communist Party took over mainland China and formed the People's Republic in 1949 the line was adopted and revised to nine dashes/dots, as endorsed by Zhou Enlai. The legacy of the nine-dash line is viewed by some PRC government officials, and by the PRC military, as providing historical support for their claims to the South China Sea (Territorial disputes in the South China Sea, Wikipedia).
The Nine-Dash Line—at various times also referred to as the "10-dash line" and the "11-dash line"—refers to the undefined, vaguely located, demarcation line used initially by the Republic of China (1912–1949) and subsequently the governments of the Republic of China (ROC / Taiwan) and the People's Republic of China (PRC), for their claims of the major part of the South China Sea (Nine-Dash Line, Wikipedia).
On 12 July 2016, an arbitral tribunal constituted under Annex VII to the 1982 United Nations Convention on Law of the Sea ruled that China has no legal basis to claim "historic rights" within its nine-dash line in a case brought by the Philippines. The tribunal judged that there was no evidence that China had historically exercised exclusive control over the waters or resources within the Nine-Dash Line. The ruling was rejected by both Taiwan and China.
Despite having no historical rights over the entire South China Sea, China has been able to get control of nearly entire South China Sea by building artificial islands (China’s Sea Control Is a Done Deal, ‘Short of War With the U.S.’, New York Times)
“Till mid-1970s, only 10% to 15% of the profits used to go to the share market.”
A similar thing is happening in financial world. The share market is squeezing the juice out of the fruit (the general economy) and we all know what it is that is left in a fruit when the juice has been taken out. Nowhere, however, is it written that all of the profit should go to the share market. Till mid-1970s, only 10% to 15% of the profits used to go to the share market. It is only due to massive Goebillian propaganda by the ultra-rich that people nowadays assume companies’ top priority is to maximize the share price and also to return nearly all the profits to the shareholders. It is worth noting that during the 1930s Great Depression, IBM did not lay off even a single employee (Maximizing shareholder value: The goal that changed corporate America, Jia Lynn Yang, Washington Post. August 26, 2013). These days even if firms have profits, they routinely layoff employees to show profits each quarter.
As per Goldman Sachs, buy-backs (by US firms) were going to be about $1 trillion in 2019 and nearly half of them were financed by (low interest) debt (More than Half of All Stock Buybacks are Now Financed by Debt. Here’s Why That’s a Problem, Larry Light, Fortune, August 20, 2019). Only a few firms have access to the US Fed rock bottom interest rate funds. Also, if the firm goes down due to economic recession or depression (which we are witnessing right now), then this debt becomes non-performing assets (NPA) for the banks.
Only a few have the economic intelligence required to make money in the financial world which is creating the massive inequality. Only the government has the capability to make the field level for everyone.
Unless the Modi administration take the step to reverse the inequality, we might again see the rise of much more violent urban form of Naxalbari Movement which will be disaster for the country. We want Mr. Modi to bring the changes rather than to see Charu Majumdars and Kanu Sanyals to destroy the country because in the latter case it will be much more bloodier war between new Urban Naxal and government forces than late 1960s and early 1970s war between them.
Accumulation of large tracts of land by a few people gave rise to Naxalbari Movement in West Bengal during the 1960s and early 1970s. In order to pacify the landless villagers, the Left Front Government in West Bengal, which came to power in 1977, went for massive land redistribution. Through Operation Barga, millions of share-croppers were given inheritable rights on lands they tilled. These sharecroppers were their vote-banks and because of them the Left Front won elections after elections until 2011. On the national level, the then Prime Minister Indira Gandhi had to come up with 1972 Land Reforms Act, having a ceiling limit at 40 acres (this number was dependent on the type of land), to thwart the further rise of the Naxal Movement in other parts of India.
Similarly, the time has come to have both a ceiling and a floor (minimum income) of wealth to be defined by the government, otherwise we will see the rise of much more violent form of urban form of the Naxal Movement. Only a few are in a position to make millions and billions of rupees on the share market by transferring money from one account to another account by mouse clicking. Hence, the remaining 99.99 per cent of the population is at a disadvantage as they do not have access to this sort of money-making instrument. Only the government has the capability to make a level playing field for everyone.
“The Modi administration should stop thinking about Dalal Street and start thinking about how to take care of Main Street only.”
(B) Indian needs wealth tax
For the next one and a half years, i.e. till the Coronavirus vaccine is found, barring a few sectors like health and medical, nearly all industries, like housing/real estate, auto industry, airlines, travel food and hospitality, are going to collapse, resulting in a tsunami of bankruptcies, causing massive NPA for the financial sector. For an example, new car sales in UK dropped by 97% to 1946 level (UK new car sales plunge 97% to lowest level since 1946, Reuters, May 4, 2020). Most of industries would see sharp drop and their share prices would drop sharply despite prop up by Fed money. Therefore the Modi administration should stop thinking about Dalal Street, i.e. Indian share market and should think about how to take care of Main Street only. Also India does not have capability like US Fed to prop up Dalal Street. Government tax collection will drop drastically. Income tax does not work because wealthy and firms hire tax attorneys to find loopholes and do not pay any tax. Hence the Modi government needs to emulate the Franklin Delano Roosevelt (FDR) and tax the rich to get India on its fee again.
Even before the Coronavirus economic carnage, the IMF Managing Director Kristalina Georgieva was in favor of taxing the rich to reduce the inequality as she wrote in her blog early this year, “Progressive taxation is a key component of effective fiscal policy. At the top of the income distribution, [IMF] research shows that marginal tax rates can be raised without sacrificing economic growth. (Reduce Inequality To Create Opportunity, Kristalina Georgieva, IMF Managing Director, January 7, 2020). Some IMF analysts have also come up with policy papers asking governments to tax wealthy (The IMF says governments should consider new wealth taxes to raise cash from the rich as coronavirus slams the global economy, Joseph Zeballos-Roig, Business Insider, April 21, 2020).
"Even before the Coronavirus economic carnage, the IMF Managing Director Kristalina Georgieva was in favor of taxing the rich to reduce the inequality as she wrote in her blog early this year, “Progressive taxation is a key component of effective fiscal policy. At the top of the income distribution, [IMF] research shows that marginal tax rates can be raised without sacrificing economic growth."
During the 2020 Democratic Party Primaries in the US Presidential elections, the Wealth Tax was a hot topic. Wealth tax was very popular, even among Republicans. In July 2019, a poll from the New York Times and Survey Monkey found that two-thirds of all Americans, including 55% of Republicans, approved of a 2% wealth tax on all people with wealth over $50 million (How Would A Wealth Tax Work?, Danielle Kurtzleben, NPR (US), December 19, 2019). Americans like Wealth tax more than a top marginal tax rate of 70% for income over $10 million. (A majority of Americans approve of Elizabeth Warren's new tax on the wealthy, according to a new poll, Bob Bryan, Business Insider, Feb 1, 2019). On the other hand, the Republican Party leaders have sold themselves to the highest bidder and hence they vote for tax-cuts after tax-cuts.
The indications are that the economic crisis due to the Coronavirus is going to surpass the 2008-9 Great Recession and its effects will be as devastating as the 1930s Great Depression. It is worth noting that the 1930s Great Depression started by the collapse of the stock market and despite two massive stimulus packages by the Franklin Delano Roosevelt (FDR) administration, the US economic came out of the economic depression only after the massive expenditure for the World War II. It is an irony that the US Conservatives who hate the government and opposed the FDR Stimulus packages and his New Deal, are behind the latest massive US stimulus after the record jobs losses recently.
We should thank the three IRS officers who went public with their recommendation of tax hike on wealthy to start a public discourse on this topic. Mr. Modi should revoke the suspension of the three IRS officials at the earliest. I consider him the best PM India ever had and he is incorruptible (please read my article: Modi, the Best PM, India Has Ever Had, but He Needs to Stop Viewing India from the Prism of Gujarat), but he should stop pandering to the US-style crony capitalism which is destroying Indian economy. It is worth noting that the BJP won majority mainly because of the so-called Surgical Strike on Pakistani soil after 2019 Pulwama terrorist attack otherwise BJP was projected to win only between 200 to 200 seats although the NDA was projected to win majority, Mr. Modi would have not had been the PM as BJP’s allies does not like Mr. Modi’s working style as he does not listen to anyone (that’s why I like Mr. Modi, i.e. because he is incorruptible).
"Only a few are in a position to make millions and billions of rupees on the share market by transferring money from one account to another account by mouse clicking. Hence, the remaining 99.99 per cent of the population is at a disadvantage as they do not have access to this sort of money-making instrument. Only the government has the capability to make a level playing field for everyone."
India needs a New Deal similar to the FDR New Deal during the 1930s Great Depression and for this purpose India can get money only by taxing wealthy. The stock market is not a measure of health of a nation’s economy. As discussed in my paper Part III Coronavirus - US Fed for Keeping US Treasury Interest Payment Low – Reason Behind Stock Market Bubble and World-Wide Inequality, the stock market is not a measure of a nation’s economy. For an example, over the last two decades the US Fed has gradually reduced the interest rate so that the US government can pay the interest on its debt which is increasing every year, but a decrease in interest rate (rate which is right now zero) has create created a bubble in stock market and real estate. The US-style capitalism is in its stage as the US Fed has open its last arsenal of its zero interest hose of free money to save the Stock Market otherwise the Stock Market would tank to one third to one fourth of its highest level. As discussed in this paper, India needs to look beyond the life after the US Dollar as the global currency as China has the capability to make the US a Weimar Republic and China might do it in very near future because it would like to like to end the weaponization of US dollar by the US, especially by the Trump administration to terrorize its adversaries.
(C) US Economy – Socialism for Rich
(Source: Why this screenshot of CNBC’s ‘Mad Money’ host Jim Cramer is ‘everything that is wrong with America’, Shawn Langlois, MarketWatch, April 13, 2020).
The US economy follows socialism. In traditional socialism, the government takes money from rich and gives it to the middle class and poor whereas in the US economy, the government gives money to the ultra-rich at the expense of everyone.
The above screenshot shows what is wrong with the American economy. The economy is losing massive number of jobs but stock market is climbing. Till April 30, job losses were 30 million (U.S. Employment Numbers Rocket Past 30 Million, David Crary, Christopher Rugaber and John Leicester, AP, April 30, 2020). In the first quarter of this year, the US economy shrank by 4.8% (U.S. Economy Shrank 4.8% Last Quarter As Virus Struck, Martin Crutsinger, AP, April 29, 2020.) most after the 2008-9 Great Depression. The nonpartisan Congressional Budget Office predicts U.S. gross domestic product will contract at nearly a 40% annual rate in the second quarter, with unemployment cresting at 16% in the third quarter. But even next year, the CBO sees the jobless rate still averaging above 10 percent. Before the pandemic struck, the U.S. jobless rate had been hovering at a 50-year low of 3.5%. (U.S. economy faces historic shock, with 16% joblessness possible, Trump adviser says, Tim Ahmann, Reuters, April 26, 2020). As per the US Treasury Secretary, the actual US jobless rate has already could be close to 25%, nearly equal to 24.9% during the worst of 1930s Great Depression (Steve Mnuchin: Actual U.S. Unemployment Rate ‘Could Be’ Close To 25%, Hayley Miller, Huffington Post, May 10, 2020). For an comparison, unemployment rose to a peak of 10 percent only in October 2009 during the 2008-9 Great Depression. More than 23 million workers are without a job. In February, just 5.8 million lacked work (Soaring joblessness could shake U.S. economy, politics for years, David L. Lynch, Washington Post, May 8, 2020).
Never let a good crisis go to waste: as the coronavirus pandemic sweeps the world, America’s 1% have taken profitable advantage of the old saying. Some of the richest people in the US have been at the front of the queue as the government has handed out trillions of dollars to prop up an economy it shuttered amid the coronavirus pandemic. At the same time, the billionaire class has added $308bn to its wealth in four weeks - even as a record 26 million people lost their jobs. According to a new report from the Institute for Policy Studies, a progressive thinktank, between 18 March and 22 April the wealth of America’s plutocrats grew 10.5%. After the last recession, it took over two years for total billionaire wealth to get back to the levels they enjoyed in 2007. ('Heads we win, tails you lose': how America's rich have turned pandemic into profit, Dominic Rushe and Mona Chalabi, The Guardian, April 26, 2020; Wealthiest Americans raking in billions from coronavirus pandemic: report, Kristin Myers, Yahoo Finance, May 1, 2020).
Overall, stocks are up across all indices more than 30% from that low point in late March. What is going on? How can it be that stocks are soaring when the economy is crashing? Market movements are often head-scratching, but in this case, the answer may be relatively simple: because of moves by the Federal Reserve, financial markets are awash in money, vast, water-hose supplies of money. Since March, the Fed has committed to lend or buy trillions of dollars of financial assets, which by some estimates might end up exceeding $8 trillion dollars by the time all is said and done. No one knows how high that figure will climb. By way of comparison, during the last financial crisis in 2008-2009, the Fed ended up adding about $3 trillion over the course of several years. And it’s not just the Fed. Congress has allocated almost $3 trillion in economic aid; the Bank of Japan is doing much the same as the Fed for the world’s third largest economy; the European Central Bank is not far behind, and multiple governments around the world are following suit. The result is that even as real-world economies freeze and implode in the short-term, financial markets are buoyed by a tsunami of liquidity. (Stocks Are Recovering While the Economy Collapses. That Makes More Sense Than You'd Think, Zachary Karabell, Time, April 29, 2020).
Unless the Coronavirus suddenly goes away on its own, the Fed’s unlimited money may go wasted because values of majority of the firms at share market are not sustainable. Despite successful containment in first phase, Seoul closed down more than 2,100 bars and other nightspots in second week of May 2020 because of a new cluster of coronavirus infections, Germany also scrambled to contain fresh outbreaks at slaughterhouses, and Italian authorities worried that people were getting too friendly at cocktail hour during the country’s first weekend of eased restrictions. The new outbreaks — and the fears of a second wave of contagion — underscored the dangers authorities face as they try to reopen their economies (Coronavirus flare-ups in Germany, South Korea show the risks in easing restrictions, Los Angeles Times, AP, May 10, 2020).
(D) Majority of Americans wants to tax wealthy
During 2020 US Democratic Party Presidential Primary campaigns, Senators Elizabeth Warren and Bernie Sanders helped popularize the wealth tax during their progressive presidential campaigns.
Senator Bernie Sanders’ wealth tax is progressive, meaning the rate individuals or married couples pay rises in tandem with their net worth. His wealth tax, which his campaign introduced in September 2019, would require married couples with a net worth of $10 billion or more to pay an 8% annual tax. Those couples with a net worth of $5 billion to $10 billion would pay 7%, and those with a net worth of $2.5 billion to $5 billion would pay 6%. The lowest bracket covered under Sanders’ plan — couples with a net worth ranging from $32 million to $50 million — would pay 1% (Bernie Sanders’ wealth tax would raise $1 trillion less than he estimates, Wharton study shows, Thomas Franck, CNBC, January 23, 2020).
"During the 2020 US Presidential Primary Election Survey, 2/3rd of all Americans approved of Wealth Tax."
Senator Elizabeth Warren has introduced an idea to levy a 2% tax on wealthy Americans' assets over $50 million and an additional 1% tax on assets over $1 billion. In order to gauge people's reaction of Warren's idea, (Business) INSIDER asked whether they approved of a new proposal that would apply a 2% tax on the net worth of the 75,000 households with more than $50 million in total assets. Those with over $1 billion in assets would face an additional 3% tax. Additionally, INSIDER informed respondents that the proposal is intended to curb the concentration of wealth in the US and economists estimate it would raise $2.75 trillion over a decade. In response, 54% of respondents approved of the idea, while just 19.1% disapproved. 14.7% of people neither approved or disapproved. The idea polled better than US Congress Representative Alexandria Ocasio-Cortez's idea to introduce a top marginal tax rate of 70% for income over $10 million. (A majority of Americans approve of Elizabeth Warren's new tax on the wealthy, according to a new poll, Bob Bryan, Business Insider, Feb 1, 2019)
(Source: Bloomberg's 'tax on the very rich' isn't actually a wealth tax like the ones Warren and Sanders have proposed. Here's how they compare, Taylor Nicole Rogers, Business Insider, Feb 22, 2020).
New York ex-Mayor and a billionaire, Michael Bloomberg's proposal does trade feasibility for earning potential, however. The "surtax" would net the federal government about $4 billion a year, or $40 billion over a decade, CBS News estimates. The billionaire says on his campaign website that he would spend the funds on rebuilding infrastructure, improving public education, and widening access to health care if elected, but he would have far less to work with than Warren's $2.75 trillion and Sanders' $4.35 trillion over the same time period (Bloomberg's 'tax on the very rich' isn't actually a wealth tax like the ones Warren and Sanders have proposed. Here's how they compare, Taylor Nicole Rogers, Business Insider, Feb 22, 2020).
"Unless the Modi administration take the step to reverse the inequality, we might again see the rise of much more violent urban form of Naxalbari Movement which will be disaster for the country. We want Mr. Modi to bring the changes rather than to see Charu Majumdars and Kanu Sanyals to destroy the country."
A study by The University of California at Berkeley's Emmanuel Saez and Gabriel Zucma, published in the Brookings Papers on Economic Activity, found that if a moderate wealth tax had been introduced in 1982, Jeff Bezos' fortune, the richest man on the Earth, would be half what it was in 2018. Bill Gates, meanwhile, would be $61 billion less rich. While no such study has been done on Sanders' proposal, NPR's Greg Rosalsky reported that it "wouldn't just slow the growth of wealth at the top. It would essentially stop it." (Bloomberg's 'tax on the very rich' isn't actually a wealth tax like the ones Warren and Sanders have proposed. Here's how they compare, Taylor Nicole Rogers, Business Insider, Feb 22, 2020).
That means that this year, Sanders' plan would affect around 182,000 people, and Warren's plan would affect 70,000, according to estimates from Emmanuel Saez and Gabriel Zucman, two economists who back a wealth tax and did revenue estimates for Warren and Sanders' campaigns. (How Would A Wealth Tax Work?, Danielle Kurtzleben, NPR (US), December 19, 2019)
It is worth noting that in 2016 Bernie Sanders’ candidature was sabotaged by the Democratic party establishment as the party establishment was fully behind Hillary Clinton. Once Wikileaks exposed it (2016 Democratic National Committee email leak, Wikipedia), it led to the resignation of the then Democratic National Committee chair Debbie Wasserman Schultz. It was also a major reason for the defeat of Hillary Clinton at the hands of Donald Trump, the eventual winner, as Sanders’ voters sat at home, i.e. did not vote at all. Had Sanders been the Democratic Party candidate in 2016, he had a greater chance to defeat Trump as he would have had won several Midwest states which went to Trump in the 2016 November Presidential election. During the 2020 Democratic Party Primaries, Sanders had the most money and workers on the grounds than all the Democratic candidates and started wining states after states. It again caused alarm among the Democratic Party establishment as their leaders started comparing Sanders to the British Labor Party leader Jeremy Corbyn (Biden has now lost twice, and top Democrats are terrified Sanders will do to them what Corbyn did to Labour in the UK, Business Insider, February 12, 2020), who went too far left causing Labor party to a historic defeat. Hence the Democratic party establishment made all the candidates to drop out making it two candidate primary battle and South Carolina, where African American (Black) are in majority in Democratic Party, heavily went for Joe Biden and thereafter Joe Biden went on winning states after states in two men field, eventually forcing Sanders to withdraw from the field.
As of 1990, 12 OECD countries had wealth taxes in place. Now, three do. And this is a statistic that wealth tax opponents often point to as evidence against wealth taxes. There were a few reasons why these countries repealed these taxes, as NPR's Greg Rosalsky reported in March 2020: they were tough to enforce, they led to rich people fleeing the country, and they didn't bring in a lot of revenue. But then, the campaigns have their proposals for increased enforcement. As Warren told Rosalsky, "I specifically designed this proposal to account for lessons learned from wealth taxes in other countries." And unlike the wealth taxes in several European countries, the thresholds for Warren and Sanders' taxes start in the tens of millions, meaning they'd only be imposed on the richest of the rich. (How Would A Wealth Tax Work?, Danielle Kurtzleben, NPR (US), December 19, 2019)
Emmanuel Saez and Gabriel Zucman, the economists who helped Warren and Sanders craft their wealth taxes, have been making the case in academic articles and newspaper op-eds that a wealth tax would succeed here because the U.S. is different. European wealth taxes generally hit a broader chunk of the population, aiming more at the rich than the super-rich, and had their fair share of exemptions for items like art or companies where the owner was heavily involved in the business. The Sanders and Warren versions of the wealth tax, on the other hand, would only affect people with tens of millions of dollars in assets, and their plans aren’t currently designed to have exemptions. (Sanders and Warren want to tax the rich. Here’s why their plans could work, Bernie Becker, November 18, 2019)
(E) Wealth Inequality in India
India’s wealth inequality is the second largest in the world, after Russia, as shown in Chart 2. Between 2011 and 2016, the wealth of the top 1% has increased from 40.3% to 58.4% of the total wealth, while the wealth of the top 10% increased from 68.8% to 80.7%. On the other hand, the wealth of bottom 90% reduced from 31.2% to 19.3%. It means that every 9 out of 10 of India’s population together owns less than 1/5 of India’s wealth.
[Note: The above data is from yearly Credit Suisse Global Wealth Databook from 2010 to 2016. In their 2017 Databook, the numbers are below the 2016 values which show a revision of the method of their calculation and not the trend. Not only in India but world-wide, the rich are becoming richer at the expense of all others.]
On top of that, wealth inequality tends to be self-reinforcing — people make money off their wealth (via returns on whatever investments they've made), giving themselves more wealth. (How Would A Wealth Tax Work?, Danielle Kurtzleben, NPR (US), December 19, 2019)
Is the accumulation of wealth in a few hands good for the labor market, or could economic development do with a more decentralized model? It is common knowledge that different people do different things with money. If you give one crore rupee to:
a) a rich man, he may buy a Ferrari car.
b) 10 middle class persons (each 10 lakh); they may buy 10 houses or 10 cars.
c) 100 poor people (each 1 lakh) they may spend it in consumer retail markets, such as on food, clothing, school/college, doctor/medicines, a family (used) car, kids, holidays, etc.
