Friday, August 03, 2007

Why India Should Raise Capital Gains Taxes?

I think I found the perfect answer to two problems facing India.

a) Widening disparity between rich and poor
b) Currency appreciation because of huge capital inflows

Simple. The government should increase long-term capital gains taxes from the stupidly low 0%. Which country in the world has these kind of taxes? Manmohan Singh complaints that CEOs are making 5 crore in salary. They have made much more through stock appreciation. True stock markets will take a hit, and true that capital will flow out suddenly. But I think a 10%-15% capital gains tax is justifiable and can be justified to investors. It is better than the capital controls that RBI hinted to in its credit policy and which would really hurt investor sentiment towards India.

If Democrats seize power in next year's Presidential elections, expect a tax hike in US too. I also figured out the debate over taxes that PE pays. Currently they pay capital gains taxes (15%) on the gains they make by buying and selling companies. Some people are now arguing that since it is the job of PE guys to buy and sell companies, the gains should be considered as income and taxed at income tax rate (35%), rather than capital gains tax rate. I am in the camp of higher tax rates to lower income disparities. I think government is a better circulator of wealth than PE guys through their charities (the argument being made by PE guys as to why they shouldn't be taxed highly). The assumption, of course, that I am making here is that a equal society is better than an unequal one.

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