How do you spur demand in an economy? By raising direct taxes and distributing the money among the poor, says this year’s winner of the Nobel prize for economics.
Reducing taxes to boost investments is a myth spread by businesses, says Abhijit Banerjee, who won the prize along with Esther Duflo of the Massachusetts Institute of Technology (MIT) and Michael Kremer of Harvard University for their approach to alleviating global poverty. “You are giving incentives to the rich who are already sitting on tons of cash.”
Countries from China to India to Indonesia are slashing taxes for businesses to spur growth amid a gloomy outlook for global economic expansion. The International Monetary Fund last month made a fifth-straight cut to its 2019 global growth forecast, pegging it at 3 percent.
“You don’t boost growth by cutting taxes, you do that by giving money to people,” Banerjee said in an interview on Oct. 21, suggesting that cash in the hands of the poor will drive consumption. “Investment will respond to demand.”
China earlier this year rolled out tax cuts worth US$280 billion on personal income and corporate profits, while India surprised with a US$20 billion stimulus, taking its corporate tax rate to among the lowest in Asia. Indonesia also plans to lower tax on companies to 20 percent from 25 percent.
MIT Professor Banerjee spoke in New Delhi where he was promoting his book Good Economics for Hard Times.
Last year, US President Donald Trump unveiled a US$1.5 trillion tax package, and has promised “very substantial” tax cuts in 2020 for “middle-income” Americans.
It’s the widening inequality in developed countries such as the US that has angered people and is pushing the world into a trade war, Banerjee said. “It is unbelievable that in the name of growth you have allowed inequality to explode to this point.”
Growth in India, Asia’s third-largest economy, has slumped to a six-year low as consumption is weak, prompting the central bank to cut interest rates to the lowest in almost a decade.
The government complemented the monetary policy easing with a series of measures to reverse the demand slowdown. Those steps — including scrapping a tax on foreign funds to allowing tax concessions on vehicle purchases — have raised concerns of a fiscal slippage.
“Given the demand slump it’s not a bad thing for the government to be expansionary,” Banerjee said. “If we want to stimulate demand and corporate tax cut doesn’t do that, which is my prediction, then what do we do.”
True or False
1. Abhijit Banerjee believes that cutting taxes is the key to spurring economic growth.
2. According to the article, the inequality gap between the rich and poor is a contributing factor to the trade war.
3. Banerjee believes that increasing government spending may be the solution to stimulating demand in India and other economies.
4. The winners of the 2019 Nobel Prize in Economics were awarded for their research on poverty.
(Lin Lee-kai, Taipei Times)
1. spur demand phr.
(ci4 ji1 xu1 qiu2)
2. economy n.
(jing1 ji4 ti3)
3. distribute v.
分配 (fen1 pei4)
4. poverty n.
貧窮 (pin2 qiong2)
5. consumption n.
消費 (xiao1 fei4)
6. tax cut phr.
減稅 (jian3 shui4)
7. personal income phr.
(ge4 ren2 suo3 de2)
8. inequality n.
(bu4 ping2 deng3)
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