Kathmandu:

We respond to incentives and disincentives. Our behaviour is affected by them, sometimes very powerfully. For businessmen expectations of profit is their incentive. Commissions motivate salespersons. Salaries, increments and promotions spur workers towards higher productivity.

When people can keep more of what they make they have an incentive to keep trying to make more. If, however, the government levies taxes, people respond by either cutting back on their business activity or by taking it underground, beyond the pale of the taxman. Taxes act as a powerful disincentive for all of us, businessmen are no exception.

This is true not only of the people of Nepal, but also, of the wealthy in the US. In 1988, George Bush (the current president’s father) made his famous, “Read my lips. No new taxes!” pledge.

This helped him to win the elections and put him in the White House. Two years on, in the summer of 1990, under pressure from the US congress, Bush, reneged on his pledge and increased taxes. The people of America never forgave him for this and he lost the next, 1992, presidential election to Bill Clinton.

Among other tax increases the US president and the Congress hiked taxes on jewelry, private and corporate aircrafts, and boats. They thought that all these luxury goods are used by rich and taxes which ‘soak’ them are always popular with the voters, so why not let the rich have it with higher taxes. The effects were entirely the opposite of what the US government hoped for.

The government expected $31 million in new revenue in the first year from these new taxes. The levies brought in just $16 million as the ‘rich’ cut back their purchases in response to higher prices caused by these taxes. Not only that, the US government had to shell out $24 million in unemployment benefits to workers earlier employed in making jewelry, aircrafts and boats. Result: a net loss of $8 million for the government instead of $31 million expected gain!

Governments around the world in rich and poor countries alike forget that taxes create disincentives. Reduce taxes or better still eliminate them and you create a great climate for the flowering of our creativity.

In India, when Indira Gandhi was PM, there were years in which the tax burden went over 100 per cent of some people’s income. The income tax rates alone had been escalated to over 90 per cent, and this combined with levies on wealth, gift and property, lead many individuals to have to pay more than their entire income as taxes.

We will never know what Mrs Gandhi was thinking when she did this. We do know what happened: India slipped into a severe recession, earning black-money became a national pastime, and many people took their money abroad where lower taxes meant better returns. This capital flight resulted in the highest ever premiums for the US dollar in India’s thriving currency black-market. People got so used to keeping their own money out of the clutches of the government that today when tax rates stand substantially reduced people still do not pay them. Old habits indeed die hard.

The aim of any government is to make its citizen progress. If the government was to understand that human progress is better served by people keeping what they earn, then, it would be logical to eliminate or substantially reduce taxes.

Hong Kong has no import tariffs; income and corporate tax at 16 & 17.5 per cent respectively are among the lowest in the world. People keep more of what they earn. The result: you see less of abject poverty in Hong Kong than on the streets of New York. The Hong Kong government, inspite of low taxes, consistently ran surpluses. People, without the safety net of government welfare handouts, transformed Hong Kong from a poverty-stricken sleepy fishing village 60 years ago to what it is today — one of the world’s leading financial and commercial hubs. If Nepal lowers taxes, it would see greater business activity and a mega increase in foreign investment seeking a higher return. This would mean a quantum leap in employment opportunities, and hence be a solution to Nepal’s most pressing problem: finding work for its youth.

(The writer can be contacted at: everest@mos.com.np)