Marx got many things wrong about capitalism, but this capital glut dilemma is now playing out in 70mm.
If the world is turning protectionist, from USA to Britain to even mainland Europe, where anti-immigrant parties are growing in strength, there are several reasons for it. Jobs, growth and incomes have not been rising in the western world.
But underlying this “secular stagnation” is a stark reality of the global political economy: the balance of power between capital and labour has tilted dramatically in favour of capital in recent decades, thanks in part to globalisation, automation, and the relatively greater freedom and tax benefits given to facilitate global capital movements relative to labour.
Put simply, capital moves more easily across borders than labour, and capital owners are taxed less than those making a living from labour, whether physical or mental. This is why Warren Buffett, the iconic investor, says he pays a lower tax rate than his secretary.
This state of affairs makes even less sense when the world is awash with excess capital and an abundance of “relatively less skilled labour” (hence the voter attraction to Trump, and for Brexit), which ends up making things worse.
When capital is in surplus and cheap, and returns on capital taxed lower, it is even more tempting to replace labour with capital (which means more automation, and a dramatic shift in the focus of employment from the less skilled to the more skilled, which further increases income skews and the creation of even more capital surpluses).
To give just a few illustrations of the kind of cash sloshing around with corporations, here are some pointers.
Apple Inc alone has $246 billion in idle cash right now. Around the middle of last year, the top five tech companies (including Google, Oracle, Microsoft and Cisco) accounted for more than $500 billion in corporate cash holdings.
A CNBC report says that US corporations are holding around $2.5 trillion (more than India’s GDP) abroad, and another $1.94 trillion in domestic assets. Over and above this, the US money markets held $2.66 trillion in investor cash, while banks were stashing another $2.15 trillion in excess reserves with the Fed. Taken together, that’s $9.25 trillion in idle cash – half the size of the US economy.
In Japan, thanks to two decades of flat or shrinking demand, corporate savings have been consistently over 20 per cent of GDP for some years now.
In Britain, the FTSE companies were sitting on $66 billion of free cash some time ago.
In our own country, cash-spewing companies are not that many in number, but concentrated in the tech sector. According to a Business Standard calculation, Infosys hold nearly 15 per cent of its market value in cash, TCS 8 per cent, HCL Tech 8 per cent, and Wipro a massive 27 per cent. Such high cash levels in these companies are indicative of low investment opportunities at current valuations.
But India’s tech companies are exceptions, and pale in comparison to the first world’s growing cash surpluses. These indicate low possibilities of profitable investment, especially in a climate where the central banks have been offering almost zero-cost money to borrowers. The people gaining most from this free money are speculators, who have used cash to invest in shares and other assets, including bonds at low yields, increasing income inequalities and the wealth skew.
The global financial crisis of 2008 and consistently misdirected policies of central banks – especially endless cheap money – have helped enrich exactly those people who brought the financial sector crashing eight years ago.
The only way to start ending this capital glut is to reverse the current tax situation, where earnings on idle capital (capital gains on shares, interest income, dividends) are given kid-glove treatment, and income and corporate taxes are higher. It is time to tax earnings on passive capital on a par with earnings from business and wages/salaries.
Tax incentives must be focused on encouraging real job-creating investments, including public and private investment in public infrastructure, and not retention of savings with cash-rich companies.
Rebalancing the taxation of capital and labour earnings will, hopefully, lead to more job creation and less capital-intensive investment.
The world is simply too awash with capital to really create jobs. Beyond a healthy level of corporate savings, surplus cash is counter-productive. The more capital accumulates, the easier it gets to invest in labour-displacing investment.(evident from the leanings of previous Industrial Revolutions)
It’s time for capitalists to read Karl Marx, who predicted precisely this kind of capital glut and a maldistribution of incomes that reduces the possibility of expanding markets. Marx got many things wrong about capitalism, but this capital glut dilemma is now playing out in 70mm.
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Petrol in India is cheaper than in countries like Hong Kong, Germany and the UK but costlier than in China, Brazil, Japan, the US, Russia, Pakistan and Sri Lanka, a Bank of Baroda Economics Research report showed.
Rising fuel prices in India have led to considerable debate on which government, state or central, should be lowering their taxes to keep prices under control.
The rise in fuel prices is mainly due to the global price of crude oil (raw material for making petrol and diesel) going up. Further, a stronger dollar has added to the cost of crude oil.
Amongst comparable countries (per capita wise), prices in India are higher than those in Vietnam, Kenya, Ukraine, Bangladesh, Nepal, Pakistan, Sri Lanka, and Venezuela. Countries that are major oil producers have much lower prices.
In the report, the Philippines has a comparable petrol price but has a per capita income higher than India by over 50 per cent.
Countries which have a lower per capita income like Kenya, Bangladesh, Nepal, Pakistan, and Venezuela have much lower prices of petrol and hence are impacted less than India.
“Therefore there is still a strong case for the government to consider lowering the taxes on fuel to protect the interest of the people,” the report argued.
India is the world’s third-biggest oil consuming and importing nation. It imports 85 per cent of its oil needs and so prices retail fuel at import parity rates.
With the global surge in energy prices, the cost of producing petrol, diesel and other petroleum products also went up for oil companies in India.
They raised petrol and diesel prices by Rs 10 a litre in just over a fortnight beginning March 22 but hit a pause button soon after as the move faced criticism and the opposition parties asked the government to cut taxes instead.
India imports most of its oil from a group of countries called the ‘OPEC +’ (i.e, Iran, Iraq, Saudi Arabia, Venezuela, Kuwait, United Arab Emirates, Russia, etc), which produces 40% of the world’s crude oil.
As they have the power to dictate fuel supply and prices, their decision of limiting the global supply reduces supply in India, thus raising prices
The government charges about 167% tax (excise) on petrol and 129% on diesel as compared to US (20%), UK (62%), Italy and Germany (65%).
The abominable excise duty is 2/3rd of the cost, and the base price, dealer commission and freight form the rest.
Here is an approximate break-up (in Rs):
a)Base Price | 39 |
b)Freight | 0.34 |
c) Price Charged to Dealers = (a+b) | 39.34 |
d) Excise Duty | 40.17 |
e) Dealer Commission | 4.68 |
f) VAT | 25.35 |
g) Retail Selling Price | 109.54 |
Looked closely, much of the cost of petrol and diesel is due to higher tax rate by govt, specifically excise duty.
So the question is why government is not reducing the prices ?
India, being a developing country, it does require gigantic amount of funding for its infrastructure projects as well as welfare schemes.
However, we as a society is yet to be tax-compliant. Many people evade the direct tax and that’s the reason why govt’s hands are tied. Govt. needs the money to fund various programs and at the same time it is not generating enough revenue from direct taxes.
That’s the reason why, govt is bumping up its revenue through higher indirect taxes such as GST or excise duty as in the case of petrol and diesel.
Direct taxes are progressive as it taxes according to an individuals’ income however indirect tax such as excise duty or GST are regressive in the sense that the poorest of the poor and richest of the rich have to pay the same amount.
Does not matter, if you are an auto-driver or owner of a Mercedes, end of the day both pay the same price for petrol/diesel-that’s why it is regressive in nature.
But unlike direct tax where tax evasion is rampant, indirect tax can not be evaded due to their very nature and as long as huge no of Indians keep evading direct taxes, indirect tax such as excise duty will be difficult for the govt to reduce, because it may reduce the revenue and hamper may programs of the govt.