CAA Video series

A short video series explaining CAA. I wanted to keep the videos less than 5 mins so that easy to view.

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Rahul Prakash Deodhar, Advocate, Bombay High Court is also a private investor. He can be reached at rahuldeodhar@gmail.com, on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms"

Citizenship Amendment Act

Even those living under a rock have heard about CAA – The Citizenship Amendment Act. 2019. They have heard vocal and emotional arguments, protest and all sorts of confusing messages. In general, Indian citizens have nothing to do with CAA. The question is therefore what about CAA has evoked the protests? Is the government really discriminating against Muslims? Is the government allowed to discriminate? What about Article 14 – equality before the law? Let us answer these legally and logically. 

How to get Indian citizenship?

Indian Citizenship Act allows for 5 categories of citizenship –

1. Citizenship at the time of independence, simply put, was given to all people living in undivided India who chose to remain in India.
2. Citizenship by birth is not that easy. From January 26, 1950, up to July 1, 1987 people born in India became citizens of India. Those born between July 2, 1987, but before December 3, 2004, became citizens only if either parent was a citizen of India. A person born on or after December 3, 2004, is a citizen only if both parents are citizens OR one is a citizen and other is not an illegal immigrant at the time of birth.
3. Citizenship by descent can be claimed by people born outside India. A person born outside India before December 10, 1992, can claim citizenship by descent, only if his father is an Indian citizen. If a person is born outside India, between December 10, 1992, and December 3, 2004, can claim citizenship if either parent is a citizen of India. After December 3, 2004, if you are born outside India, you can only claim citizenship by descent by registering at the Indian embassy/consulate.
4. Citizenship by registration is available to those people who qualify in the first 3 categories but are not Indian citizens because they are citizens of other countries. These people MUST renounce their citizenship before they become eligible to become Indian Citizens.
5. Citizenship by naturalization is a category open for everyone else provided they are not illegal immigrants or descendants of illegal immigrants. In other words, illegal immigrants or their children CANNOT ever become Indian Citizens after 2003. Even if illegal migrants marry an Indian citizen their children cannot become Indian citizens.
6. Citizenship by incorporation of a territory is when a state or country joins India, its citizens will automatically become citizens of India on the date of incorporation of the territory. These citizens do not have do clear any hurdles to acquire citizenship. This was primarily used for accession of princly states into India.

Is getting citizenship a right of non-citizens?

Simply put, only people born in India (category II) and people of Indian descent (Category III) but with restrictions described above have a RIGHT to be granted citizenship. They can demand to become citizens.

Others can apply for citizenship, whether to grant them or not is the discretion of the government. Citizenship by registration which applies to those born in India or are descendants of Indians but are not Indian citizens cannot claim a right to be given citizenship. Whether to give them citizenship is at the discretion of the government officials. The same is the case with citizenship by naturalization. Just because you lived in India for more than 12 years does not give you a right to be granted citizenship.

Illegal migrants, their children and even those children of illegal migrants whose spouse is an Indian, all, are specifically disqualified from getting citizenship.

Law relating to migrants and refugees

When it comes to migrants and refugees the laws applicable to them are derived from India’s commitment to the United Nations Charter of Human Rights read along with Indian laws (i.e. Constitution, Indian citizenship Act, Foreigners Act etc.).

In turn, UN Human Rights are centered around (1) Declaration on the Human Rights of Individuals who are not nationals of the country in which they live - Adopted by General Assembly resolution 40/144 of 13 December 1985; (2) 1951 Convention Relating to the Status of Refugees along with 1967 Protocol Relating to the Status of Refugees and along with Resolution 2198 (XXI) adopted by the United Nations General Assembly. These are also summarised in the 2006 publication of Office of the United Nations High Commissioner for Human Rights titled The Rights of Non-citizens.

In common language, legal migrants and refugees have a revocable right to residency. However, they have no right to get citizenship. Whether to give them citizenship or not is up to the government.

Are migrants entitled to Article 14 -equality before the law?

Many commentators have unequivocally stated that Article 14 applies to migrants as well. However, it is not a clear case. Based on a reading of all the documents, migrants are required to be treated equally before a court of law. They have some fundamental rights, chiefly right to life and property (subject to restrictions), etc. The UN High Commissioner’s publication mentions that State may discriminate for legitimate reasons and further allows states permits States to draw distinctions between citizens and non-citizens with respect to two categories of rights: political rights explicitly guaranteed to citizens (but not to migrants) and freedom of movement (not granted to illegal migrants).

Further, migrants, legal or illegal, cannot claim a right to be citizens. In fact, illegal migrants or refugees cannot become citizens of India. The Citizenship Act actively forbids them from becoming citizens.

Then what happens to illegal migrants?

There is no provision to give citizenship to any illegal migrant whatever be their religion. In fact, once you are established as an illegal migrant you are disqualified from getting citizenship. In fact, even if illegal migrant marries an Indian, s/he cannot be given citizenship. Their children can NEVER become citizens of India.

When the laws are read with UN HR resolutions and the Foreigners Act, India is required to deport illegal migrants to the country of their origin. They can also be deported to other countries provided they will be safe in those countries and that country is willing to accept them. Law allows for keeping illegal immigrants in detention centers or they may even be prosecuted in accordance with the Foreigners Act.

India can only deport all non-persecuted illegal migrants. Those facing persecution cannot be deported to their country of origin. All illegal migrants have a right that prevents the host government to deport them to a country where they will face persecution or abuse.

The net effect is that the persecuted illegal migrants cannot become citizens (because of the law) and cannot be deported. It implies that persecuted illegal migrants cannot be deported because of our commitment to UN human rights.

However, UN Human rights resolutions and Indian law require the government to deport illegal migrants who are not persecuted. Alternatively, they can be prosecuted under the Foreigners Act or detained.

In all these aspects the religion of the illegal immigrant is immaterial, Indian laws do not differentiate between illegal migrants based on religion.

Enter the CAA

The CAA grants a right to illegal migrants who are facing religious persecution only in 3 Islamic countries, Pakistan, Bangladesh and Afghanistan, to claim citizenship provided they have entered India before 2014. The act creates a right in favor of those who are persecuted that they may seek citizenship.

The act is a manifestation of promises made in 1947 to the minorities of undivided India. To be clear, the understanding was that Pakistan would give citizenship to persecuted Muslims of India and India will give citizenship to all persecuted minorities (at that time this group was primarily Sikhs, Jains, and Hindus – Christians were persecuted later).

Why not make minority migrants citizens under current law?

This question has to be answered in two parts.

For illegal migrants, before CAA, there is no provision in current law to give citizenship to them or their descendants from any community. If they are not persecuted, they have to be deported. If they are persecuted, they stay here as migrants. After CAA, only the persecuted illegal migrants from 3 countries who are already in India before 2014 get to apply for citizenship. Since they could not be granted citizenship, an act of parliament was required.

For legal migrants, all religions can apply. In this case, CAA merely lowers the bar for these migrants provided they are persecuted in their country of origin. This provision is simply like setting up a separate queue for wheelchair or persons with disabilities, mothers with infants etc. However, even this part, since it concerns citizenship could not have been done without an act of parliament.

Why not include Ahmadiyyas etc. who are facing persecution?

This is a complex issue and relates to all persecuted minorities - Ahmaddiyas, Baloch, Sindhis, Tibetians, etc. There are diverse categories of reasons for this, some arise from the legal aspect of partition itself, others are emotional, some are fundamental, some are practical. I am listing only the logical ones here. When you read the description below, you may not agree with a few and agree with others. But taken together, it is not possible to accept them.

First, at any point, in any country, a lot of classes of people claim to be persecuted. Landlords have been persecuted, landless have been persecuted, some are persecuted based on their sect, others because they support some political party etc. In the three countries, too many classes of people are facing persecution. Ahmadiyya, Tribals in Bangladesh, Baloch, Mohajirs, Sindhis, liberal Muslims in Taliban held areas, etc. are known to be persecuted. Only some of these are illegal immigrants. Can India accommodate all of them?

Second, legal recognition of persecution differs from actual persecution. If the law of other countries discriminates clearly then you can recognize it. However, if the law does not discriminate but provides for a remedy for any discrimination then another state cannot take cognizance of it even if in reality there is discrimination. Such recognition will become interfering in other countries' affairs. Thus, if Pakistan, Bangladesh, and Afghanistan had not amended their constitutions to become theocratic Islamic states there would not have been a legal basis to enact this law. Even today, there is no legal justification to provide for Sri Lankan Hindus, Tibetans, or Rohingyas. If, however, China or Sri Lanka were to pass a law against Tibetan Buddhists or Sri Lankan Hindus, there will be an argument for seeking a CAA for accommodating these refugees.

Third, the law does not drive the persecution of many of these groups. These groups are persecuted DESPITE the protection of the law. However, non-Muslim migrants will have no such future possibility since the constitution of these countries does not protect these minorities. These religious minorities are therefore condemned BY their law - by their constitution itself.

Fourth, the basis of partition was not a referendum* but it was premised on separation of areas of population-based on religion. The partition was negotiated by Congress, Muslim League and the British, there were several ambiguities. However, there was one clear representation on which partition was founded – that Muslims do not identify themselves through sects and regions but only through religion and that is why they want separate land. The Ahmadiyyas, in particular, were instigators of partition and actively supported the partition of India and UN resolution on Kashmir against India. Similarly, Rohingyas were keen to separate from then Burma and join East Pakistan. This peculiarity prevents India from acknowledging separate sects including Ahmadiyyas (and further within Ahmaddiyas) within Pakistan, Bangladesh or Myanmar.

Fifth, giving citizenship to persecuted citizens under various classes within former undivided India opens pandora’s box. Will we give citizenship to Baloch? Sindhis? This has the potential to unravel the partition itself. In my opinion, if we get land along with the people, India should have no problem accepting these LEGAL migrants as citizens in the future.

Sixth, you have to also consider how many persecuted people exist illegally in India. As of now, there are no data on illegal Ahmaddiyas in India. Most Pakistani illegal migrants are Hindus and Sikhs. So the Ahmaddiyas in India are legal migrants and they have a regular mechanism to be assimilated into Indian citizenship.

Finally, you cannot promise citizenship in the future to any group of persecuted minorities coming in illegally in the future after 2014 - Ahmaddiyas or even Hindu, Sikh, Jain, etc. All of them including Hindus etc. will not be given citizenship. This is done so as not to encourage persecution of these minorities in their respective countries.

In Sum

The CAA is a mechanism to handle the status of part of the ILLEGAL immigrants. It refers to those illegal migrants (the minorities) who cannot be repatriated (UN laws) and are condemned to live in India forever. CAA makes these persecuted ILLEGAL migrants only from 3 countries into LEGAL persecuted migrants.

LEGAL migrants from all over the world can apply for Indian citizenship under category V. There is no restriction on religion – ALL religions and categories (LGBTQ, etc.) and can be granted citizenship. They have to wait for 11 years before they can apply. For LEGAL persecuted migrants from 3 countries CAA reduces the waiting time to only 5 years.

Thus, CAA has nothing to do with LEGAL migrants and ABSOLUTELY nothing to do with Indian citizens. It also does not encourage illegal migration as a clear cut deadline (past deadline) means no future illegal migrants will be granted citizenship.

* The vote in favour of Muslim League was interpreted as a referendum. However, Muslim League and Jinnah himself were vocal about separate land. Also, Referendum was held in Sylhet and North-West Frontier Province. Both created enormous problems. But that is separate history lesson.

References:

• The Citizenship Act 1955
• The Citizenship (Amendment) Act 2003
• The Citizenship (Amendment) Act 2019
• The Foreigners Act 1946
• Declaration on the Human Rights of Individuals who are not nationals of the country in which they live, Adopted by General Assembly Resolution 40/144 on 13/12/1985
• The Rights of Non-Citizens published by Office Of the United Nations High Commissioner For Human Rights, 2006
• 1951 Convention Relating to the Status of Refugees – UNHCR
• 1967 Protocol Relating to the Status of Refugees – UNHCR
• Resolution 2198 (XXI) adopted by the United Nations General Assembly
•  Muslims of Burma – Moshe Yegar
• Sri Lankan Tamil Migration and Settlement: Time for Reconsideration
• About Burma: British conquest of Burma begain in 1824 with first Anglo-Burmese war. The conquest was complete in 1885 with exile of King Thibaw. Burmese province was responsibility of Government of India. With the Government of Burma Act 1935, separate Burma from India.
• Rohingyas and the unfinished business of partition
• The Misunderstood Roots of Burma's Rohingya Crisis
• Ahmadiyyas were at the forefront of creation of Pakistan, an Ahmadiyya Unit fought against India in Kashmir in 1947-48
• A Brief History of Ahmadiyya Muslim Community [ Refer to Advice for Muslims in India]
• Zaheeruddin v State [persecution of Ahmadiyyas]
• Hadi, Abdul. (2015). Injustice and Persecution: Forced Migration of Sindhi Hindus in Pakistan. Mediterranean Journal of Social Sciences. 6. 10.5901/mjss.2015.v6n2s5p11.]

[Updated with references]

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Rahul Prakash Deodhar, Advocate, Bombay High Court is also a private investor. He can be reached at rahuldeodhar@gmail.com, on twitter at @rahuldeodhar or at his website www.rahuldeodhar.com.

Buy my books "Subverting Capitalism & Democracy" and "Understanding Firms"

Indian Foreign Policy

Since last month's attack on Indian Security forces in Pulwama by the Jaish-e-Mohammad terrorist group, I have been thinking about the changes required in the national policy. Today we get the news that China once again blocked the proposal to declare Masood Azhar, the leader of JeM as a terrorist. In light of these developments here are some thoughts about Indian policy. 

Note: Many sound quite conflicting but that is the reality. I miss Narasimha Rao.

With Israel

India MUST announce a proper strategic deal with Israel including multi-faceted cooperation including defense, technology, agriculture, business, banking etc. 

We must improve integration with its defense network. A Multi-track developments must take precedence -

1. Designed in Israel, made in India, (avionics and defense info-tech subsystems)
2. Jointly designed and made by Israel and India,  (missile, interception & drone tech)
3. Designed in India and made for Israel - (aircraft and other equipment)
4. Joint Cyber warfare development cell.
5. We should have joint training - allowing Israeli forces to train in various conditions and set up training with them in Israel too.

We should aim for Agriculture and water management technology collaboration. We should explore policies that should allow Israel-India manufacturing companies to go global - compete across the world. We need to have 3 such companies be global brands like say ikea.


With Russia

India MUST announce a proper strategic defense deal with Russia as well. Russia is a long-term partner and we must improve the interaction with Russia. We must engage with Russians for heavy equipment - fighter aircraft, ships and submarine.  We should further the missile development cooperation and aim for joint technology development in defense space.

Economically, we have to help Russia ween itself from Chinese dependence. Russia should be able to stall and deny China without a huge economic cost.


With United States

That India and US are not friends is first the fault of India and then the fault of US. Unfortunately, today there a little bit of mistrust still left. 

India MUST have strategic partnership with US and must join the Quad.

1. This will include setting up bases
2. We must join the information sharing treaty with US
3. We must have/develop defense ICT that is interoperable one with US. 
4. We need cyber defense cooperation with Quad.
5. We need to step-up and take our responsibility in Indo-Pacific. 
6. We also need deeper collaboration and joint exercises between US and Indian defense forces.

With Japan

India must enhance partnership with Japan on following fronts:

1. Fighter aircraft development
2. Ship-building tech.
3. New Drone tech

 With Japan, India must set up ventures to develop infrastructure in the Indo-Pacific region. Japan has the capital and technology and India will need to give its man-power.


France
In general, it is not well-understood that France has been a long-standing defense ally of India since independence. More than Britain which somehow finds more sympathy than France. India and France need to improve the cooperation on defense as well as non-defense sectors.  We need to improve the status of France in the Indian economic and defense scheme.


South East Asia/ Asean / Asutralia New Zealand
We have to play very pro-active role in this region. We can work on the food side trying to reduce the cost of food and other goods in this part of the world.


About Pakistan
Pakistan will continue to remain an irritant unless we take proactive effort to eliminate the terrorist setup. It can be eliminated by imposing very high economic costs on the Pakistani Army. To this end, India needs to be part of Afghanistan solution. If US cedes Afghanistan to Taliban or to Pakistani Army backed group, we will soon have trouble on Indian soil.


Working in Middle East

India must UNDERSTAND and ACT on the fact that we are Hindu majority country AND we are the largest democracy of Muslim at once. India must use this to influence a lot of things in the Islamic sphere and give it a better direction. We must champion the reforms taken up by other middle eastern countries and overcome the regressive developments taking place. 

Africa

India should be able to collaborate with Africa much better than any other country. We should provide the institutional support and help African companies develop as suppliers to India. Japan and other countries will surely help us in this process. We have to showcase a credible alternative to Belt and Road but with good clean reformist credentials.

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Urban Development problem in India - the lack of proper Development Plan

Recently, I had the opportunity to examine the Draft Development Plan released by Maharashtra State Road Development Corporation (MSRDC). The plan is quite badly designed. Yet, what hurt me more was the fact that this plan was developed for Special Planning Area (SPA) which is not developed as much so the development is almost green-field urbanization. And yet, even when we are given a clean slate we make such primary mistakes in planning. I wrote about the shortcomings in an Article in Moneylife.in titled "How can smart cities be built on dumb development plans?"

I have looked at the population, water demand estimation, power demand estimation, waste estimation, transportation planning etc. On every parameter this plan falls short. Have a read and leave comments.

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Oil trade routes and India's geo-political advantage

Here is a picture about oil trade routesfrom Geopolitical futures:

You can see the Geo-political importance of India. India has access choke-points carrying about 40 million barrels per day - 4X flow at all other choke points put together. Guarded by a decent navy that can go against the best.

You will realise why China is interested in this area and interested in encircling India with string of pearls. More so if you have read Daniel Yergins The Prize. (If not read it now for understanding of oil industry).

For more details of balance of naval presence in the Indo-Pacific region look at the map below:

Naval Bases in Indo-Pacific - Rahul Deodhar (data from public sources)

These maps are important tools to understand Geo-politics and George Friedman of Geopolitical Futures has a great compilation. Head over there to check it out.

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Law and Order - The missing reform

Manas Chakravarty has an article in Mint title IBC Ordinance a blow against the Promoter Raj. It talks about new Insolvency and Bankruptcy Code reform.That raises some prospects of execution problems.

I think Modi government faces lot of execution problems because it has not acted to root out corruption. Here is my solution I wrote for Moneylife. Do have a read and leave a comment.

Notes:

World Bank report on Reform in Georgia

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Tax as a destabilising force - Border Adjustment Tax

John Mauldin, a prolific commentator, is well connected to the Republican establishment. He has recently concluded a three-part series titled Tax Reform: The Good, the Bad, and the Ugly on the coming tax reform in the US. The parts can be found here - first, second and third. It is a must read. 

The US is trying to simplify tax structures. This, by itself, is nothing new. All the countries have been trying since time immemorial to simplify tax codes. Surprisingly, they keep getting more complicated. I do not think "simplify" means what you think it means. But this time, it does seem simpler. Let us not jump the gun, it is still early days. Let the bureaucrats have a go at it and it will come out as complicated as it has ever been. Nevertheless, the intent seems to be right.

The disturbing part is the way BAT or Border Adjustment Tax is supposed to work. John paints a pretty grim picture and rightly so of the adverse consequences of ill-thought out Border adjustment tax. Mauldin and his friend Charles Gave, both seem to suggest that this move will disturb the present equilibrium. Other republicans do not think so. But there is merit in Mauldin-Gave arguments.

And then I read the US intelligence’s ‘Global Trends, Paradox of Progress’ report. That is another bleak report. What is disturbing is that the world seems to be in a precarious balance at present and 5 years out. Some situations in next 5 years as highlighted by the report:

Now the timing of BAT by Trump has become exceptionally crucial. At times in history you get amplified impact because historically small acts happened at unstable times. Here we are faced with a big act at unstable point. In effect, we are beholden to Trump's good sense, pragmatism and sense of leadership.

Interesting times these.

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Should democracies reclaim power over production of money?

Ann Pettifor writes a blog post drawing on her new book "The Production of Money: How to Break the Power of Bankers" saying as much. At the outset I must say that I love to read her articles and posts and I have tremendous respect for her.

Her diagnosis is that our present predicament is the following: (emphasis mine)

It is my view that current economic disorder is largely caused by the invisibility, the lack of transparency, and the intangibility of the international financial system – the cause of recurring global economic failure. The fact that the system cannot be seen or understood, that it is opaque to society, means that it cannot be changed or transformed by society. Widespread ignorance of the workings of the great public good that is our monetary system has made society vulnerable. Ignorance enables those financial interests that have wrested control of the system away from democracies, to continue to undermine the security of society. 

If democracies are to once again subordinate the finance sector to the role of servant to the real economy, it is vital that the public gains greater understanding of the monetary system – which I believe to be a great public good. That is the ambition of my modest book, The Production of Money.

This book indeed will be interesting. At present, I am only commenting about this post. I am with her up to this point.  Understanding the monetary and banking system is indeed important. But then she cites an example of the system:

The reality of life under a model that elevates the global over the domestic economy was starkly exposed recently by the fate of a small tea room based in Highcliffe Castle, Dorset. The tea-room had been owned and run by a local, Sean Kearney, for 17 years. It was put out to tender by the council. The company that won the tender was a global behemoth – the $14bn Aramark corporation, that owns prisons and canteens worldwide and is headquartered in Philadelphia. 

This ‘storm in a tearoom’ as The Times dubbed it, was a classic example of how today’s economic model fails the people of Britain. It pits the minnow of a locally-owned tea room against a globally powerful and financially mobile shark. This is not free market competition. This is grossly unfair, economic slaughter of a viable business. As a result Sean Kearney may well now become one of those ‘left behind’ by British government policies.

I am not sure I understand this. There are too many confusing ideas at play. Are we against a buyout of small companies by big ones? Are we against a buyout of local companies by foreign companies? Are councils beholden to grant tenders to local individuals? 

Then she says:

Depressingly, our politicians – on both sides of the House – learn nothing from this. Despite all the nationalist rhetoric, we know that the dominant economic model that led to the populist uprising for Brexit has not been seriously challenged by the Conservative party, or any of our politicians. The government will continue to stand aside as footloose, mobile capital uses its absolute advantage to swallow up the enterprising minnows of the economy, and to wreak havoc on society’s social, economic, and political goals.

This example is very casually stated - it does not buttress the case of the book. In fact, governments that intervene in such deals are frowned upon by commentators like Ann Pettifor. Such protectionist interventions are limited to companies where strategic interests are involved. (Ports, dams, critical road or intellectual property etc.) What is surprising are the steps suggested to control the capital are even more onerous.

Capital control over both inflows and outflows, is, and will always be a vital tool for doing so. In other words, if we really want to ‘take back control’ we will have to bring offshore capital back onshore. That is the only way to restore order to the domestic economy, but also to the global economy. 

Second, monetary relationships must be carefully managed – by public, not private authority. Loans must primarily be deployed for productive employment and income-generating activity. Speculation leads to capital gains that can rise exponentially. But speculation can also lead to catastrophic losses. Loans for rent-seeking and speculation, gambling or betting, must be made inadmissible. 

Third, money lent must not be burdened by high, unpayable real rates of interest. Rates of interest for loans across the spectrum of lending – short- and long-term, in real terms, safe and risky – must, again, be managed by public, not private authority if they are to be sustainable and repayable, and if debt is not going to lead to systemic failure. Keynes explained how that could be done with his Liquidity Preference Theory, still profoundly relevant for policy-makers, & largely ignored by the economics profession.

This takes the pendulum in the other direction. I have a problem with this approach.

Removing the power of creating money from Banks 

It is a bad idea. The function of banks in a properly governed system is to create money where there is a potential for creating value. This distributed money creation helps create money at the point where it is most useful. And the same time if it is not useful a money incurs a cost that is interesting and expense on the bank's balance sheet. The core principles of this process have been undermined in the recent years. But that does not mean the principle is bad. 

Dr Pettifor suggests that a public body needs to take charge of this function. In fact, governments or public agencies are absolutely the worst agency to create money. If you imagine a bureaucratic agency like central bank to take it over then you will end up with delays. Further such bureaucratic institutions are open to regulatory capture by the same banks.

The alternative is the political system. Political systems are best geared to determine "policy direction" and not operations. Thus, without expertise, if you let politicians determine the money creations you will have a worse system than what you have.

The problem with the present system is not that it has failed. But it is that it does not fail enough. The regulatory mechanisms are mollycoddling the banking industry. Because of regulatory interventions, banks do not fear the losses from risk-taking. In my book, Subverting Capitalism & Democracy I call this failure of attribution. Regulation should make these losses more directly attributable to the banks. So no bailouts. Increase capital buffers - Anat Admati recommends 30%. There should also be an unlimited liability to shareholders to the extent of losses caused by their firm. 

The "bad" debt and capital issue

Dr Pettifor is right when she says that interest rates cannot be ridiculously high. Credit-card industry is a prime example. It is in a dire need for regulatory oversight. The Elizabeth Warren's initiative to reduce the credit-card agreement to readable short form is commendable.

She is also right to the extent that loans should not be made for non-productive uses. In effect, she implies we need to differentiate good debt from bad debt. This is absolutely critical and I have said so before. Productive debt creates an asset of higher value than the debt itself.

The question we need to ask is why banks were ready to lend for non-productive activities. The answer lies in the export-led growth model pursued by developing countries - first Japan, then South East Asia and then finally China. To hold their exchange rates low they created dollar reserves sending large amounts of capital into the US. The US has benefitted enormously from this available capital. It pushed the risk curve lower thereby sending funds (venture capital) into high-risk ventures. Without the return-lowering effect of this capital Google, Yahoo, Facebook none of this would be possible.

Another side of the problem, the expert central banks have kept interest rates too low for too long. This low-interest rate regime has caused some damage resulting in mal-investment. It has also pushed capital as an alternative to labour leading to lower quality employment.

In recent years the tide has turned. The new capital was generated by consumption overseas. This capital does not want to return to the US - because of taxes and other reasons. But more importantly, this capital does not want to finance bad investment (debt or equity). If you really think it through most of the low-hanging "productive" opportunities are in developing countries. In effect, what the capital is saying is that - on a post-tax level the capital cannot create a positive, real return in the US. If such returns were possible this capital would have flown back to the US.

The real problem

Dr Pettifor's line that "you need to cut out the bankers from the production of money" may be paraphrased for marketing reasons but it is not a solution. However simple we want life to be, the reality is it is quite complex. The solution to the 2008 financial crisis is fixing the various failed incentives structures created by public systems. The solution is not the let public systems go berserk in other areas. The solution is to reorient the incentives - one by one. It is not a glamorous solution but it is the only thing that will work.

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Idiotic debate on Demonetization

Since the announcement of demonetization we have quite a lot of noise but no analysis. I am on the look out for genuine criticism of the policy.

Semantics of false criticism

There is a lot of criticism of the government's policy. The international criticism is uninformed and disconnected from Indian ground realities. Quite a bit is a shallow analysis of Nigeria, USSR and some other countries which had demonetized previously. Generally, the criticism falls into the following buckets:

1. Demonetization alone will not stop black money: That is not proper criticism. 
1. The government never maintained that it will. 
2. In fact, Finance ministry circular highlights various measures undertaken by the government till date. 
3. Further, the prime minister indicated that this was just the beginning and more announcement will come.
2. Removing 85% of the currency will cause a lot of pain to the people: 
1. Well when you ask the people, most are happy with it. Some are very angry. In a country of 1.2 billion you will have voices. 
2. The prime minister took a smart-phone based app poll which revealed 90% approve of the move. Media quickly jumped up stating the questions are biased. I myself took the poll. The questions were not as biased as media made them out to be. It is a fair poll - you CAN express dissent if you don't like the move.
3. But the fact remains none of the media channels or anyone tried to do a sms-based poll. We can have a poll for Indian Idol or some crazy show, can media people not fashion a proper poll and report if people are indeed pro- or against.
4. I tried to go through You-Tube videos about demonetisation uploaded after November 28. I suspected people will give proper reaction once they have been in ATM lines for a few days. I left out videos uploaded by news channels and focussed on videos uploaded by general people. Not many have uploaded but I found one by Roshini Ali & her friend exploring the poor of Kolkata informative. One other fellow explored Mumbai and Aurangabad but he wasn't as comprehensive as Roshini Ali.
3. Economy will be hurt as currency is withdrawn from circulation
1. This is the closest people have come to making rational arguments. I don't mind general public making this argument. But from experts, I expect more.
2. Many experts confuse the measured part of the economy (GDP etc) with unmeasured part (black economy). In an extreme view, since the black economy is not measured its destruction won't affect measured economy. That is flawed as black and white economies intermingle often. Yet they are not quite as intermingled as people make it out to be.
3. A substantial part of the black economy comes from tax evasion. For example, sales without bill are quite rampant in India. Over billing (for cold drinks) is also rampant. These are black transactions. With proper triggers, these transactions will come to the white economy. (Though demonetization is not that trigger).
4. Only time will tell if it works:
1. I understand general public expressing this sentiment. It is a healthy attitude to take.
2. But when experts take this position, I don't like this. I expect the experts to define their goals for the policy - when will they say it worked. 
3. And I want them to state it now not once results are out. Because once data is available the narrative will be tailored to the outcome.
4. Further, be realistic as to what can be achieved by demonetization. I don't want people setting targets "I want black money to become zero".
5. I want to see the goal post that is set out by all these experts.
5. Bull-shit interviews/feedback:
1. Many interviews of government officials and supporters of policy are quite brash. The interviewer does not want to know the policy but instead he wants to hammer the expert. Karan Thaper did that to Bibek Debroy (who I don't really admire - but he is most lucid in the lengthy Ashok Malik interview).
2. Most media reporting is negative and most general people reporting is positive. One TV channel interviewed a Hindi Speaking shopkeeper in Chennai.
3. If I watch TV channels interviews then I get different pictures. Pro-government channels say good things and anti-government channels always highlight bad things.
4. Some channels have shown non-working ATMs quite a few times. And others have shown longer queues giving impression that the queues are that long all the time. People who are on the ground dont find that many long queues all the time.
5. I have concluded that most of the people do not yet understand what exactly the possible strategy is. None have read the Arthakranti proposal even those who have interviewed the founder Anil Bokil.

Basic framework

Just wanted to clarify one thing here.

Tackling Black money requires a repository of measures. Yes many measures together will help reduce black money. Black money cannot be eliminated completely, it can be reduced drastically.

Demonetisation results in many things out of which one is hurting black money transactions. It freezes the black money transactions and not the assets created out of black money. It also results in other effects - anti-counterfeiting, promoting cash-less transactions etc.

The two are only slightly overlapping. Government hasn't claimed that demonetisation is only aimed at black money. It has correctly stated the what demonetisation can achieve. To confuse the two only shows your ignorance.

Policy Details - possible and others

For interested readers who want to know what is the possible logic behind Government's measures, you can parse some of the links here:

1. Amithabh Kant on CNN (focusses on going cash-less)
2. Anil Bokil on ABPMaza (in Marathi) in Anil Bokil in Hindi
3. Arthakranti Proposal (click here for benefits, benefits to individuals, objections)
4. Bibek Debroy on Demonetisation and other issues
5. Ken Rogoff author of The curse of Cash advises gradual demonetisation of high-value notes.
6. James Henry's article calling for surprise currency recall (from Ken Rogoff)

Setting Goalposts

It is important to set out clear goals when we announce the success of a measure. My goalpost is thus:

1. I want to evaluate current demonetisation on following parameters:
1. Total amount deposited with banks / total currency in circulation: I suspect we will get close to entire currency in circulation back into the bank accounts/exchanged. This is because I suspect counterfeit currency in the system is to the tune of 40% i.e. ~ Rs. 6 Trillion making total currency in circulation at ~Rs. 20Trillion.
2. GDP in Q3 and Q4 of FY 2017 should not reduce more than 1.5%. Thus I expect Q3 and Q4 to be at least 5.8%
3. Net bank deposits gain: After stabilization, i.e. say by Sep 2017, bank deposits should appreciate by at least 40% of currency in circulation i.e. Rs. 6 Trillion. This is figure after deposits and withdrawals have stabilized.
4. Share of E-transactions: As per Mastercard data 2% of transactions (number) are cash-less. I would like this number to be around 33% ~ 1 of every 3 transactions should be cashless. 
2. With respect to Black Money targeting, there should be a continuous targeting of black money holders and black economy.
3. Tax simplification and rationalization proposal in Union Budget 2017 (which will be in January). I think we should try Banking Transaction Tax once 2 out of 3 transactions are cashless.

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Destabilised Eurasia and possibility of War - The SE Asia - East Asia equation

The events of the past few weeks and years have had a decisive geo-political point to them particularly concerning South-East and East Asia. Let me enumerate a few here. 

1. In 2015 Japanese parliament permitted their army to go aggressive( with US blessings). They have been making ships and aircraft carriers since few years ago  displayed in Aussie, Singapore, Japan and US joint exercise - small allegedly helicopter carrier or something.  
2. Last week I was seeing Singapore Air Force Fighter planes on evening patrols. Also every day they have the another surveillance plane - it is not the boeing posiedon in the air. 
3. On friday, India announced surgical strikes on terror bases in Pakistan Occupied Kashmir. 
4. Last week, Singapore PM met Japanese PM Abe. Last month he met Obama. Chinese news paper is accused Singapore of siding with US. This week Singapore PM is meeting Narendra Modi.
5. Last week Japanese PM Abe met Narendra Modi and promised him some military tech and other assistance including manufacturing assistance.
6. Phillipines has abandoned US and is courting China. Durtete made a statement that he received encouragement from China and Russia on his anti-US remarks.
7. Last month the International Arbitration Tribunal restrained China from claiming rights on South China Sea.
8. Last month Austrailia published a white paper on maritime defence highlighting the need to protect the interest in the northern coasts and in the Pacific. Australia does not have any threat from any country in the Pacific save China. It is way far out and super friendly with most of the major powers. It has a love-hate relations with some island countries where China has become active.
9. US is offering F-16 (yeah the old ones) to India for make-in-India option. (The tech is old but the offer is quite lucrative)

So what is happeneing?

China is being encircled. Japan south Korea Taiwan Singapore, Australia and India are coming together step by step. South Africa is in the mix too. Philippines has chosen to side with China - or so it seems. Vietnam is on the fence blowing hot and cold. Laos is stuck between Vietnam and China but I sense it is more pro-china. Thailand is becoming more democratic but depends on their king who is about to die or may have died. 

Since China is being encircled, it thinks it can break the mix by encircling India. China thinks it can corner India because of its alliance with Pakistan. So Pak will keep India engaged on west and china will keep it busy on the east taking India out of the equation. So a day after announcement of surgical strikes we had reports of China reducing Bramhaputra waters for dam construction.

But, on day of surgical strike Iran attacked pakistan (which is weird). Afghanistan is already sick of  Pakistan. Now Pakistan thinks it too is being encircled by adversaries. Tajikistan is not really happy with Pakistan either. But it is more worried about China. So goes for Kyrgyzstan and we come to Mongolia and Russia which surround China. 

Within China too,  in Hong Kong separatist sentiment is acting up, mostly without encouragement of the west. Then there are other prennial problems in China - including Tibet, Uyghurs and others.

So we have China trying "string of pearls" strategy around India. World trying "string of pearls" around China. 

Why India is crucial element in the mix?

India is important because it is a navy that controls the major trade routes to Europe and East america. It saves a trip across Africa. So China wants to circle indian ocean by involving Africans - twin benefits resources and strategic support. So this is a move-counter move strategy. India is but small player if you ask me. I think US is the big bro here. We are seeing Obama's east pivot in action. 

Why is China all riled up?

China is being choked economically by all - sort of as a payback for its merchentilist begger thy neighbour policy. Actually when Milton Friedman was asked about dumping of low cost products, his argument was simply it benefits the importer. It means (to me, Milton did not say it so) that after the value is over you can reverse the equations by ring-fencing the excess capacity from creating problems for you.

The second narrative Chinese use is that its almost $4Trillion US Dollar reserves may lose value and thus cause wealth loss. This narrative is easy to sell to general pulic and it will make for a good anti-US story.

This has a lot of implications for China. It may wreck it from within. An empowered peasantry   / rural-folk may bring down the corporates to its knees using exactly the same arguments that Mao used. The citizenry may become subversive when faced with no jobs, or rapid decline in wealth as a result of capacity destruction. These will be difficult to control in a country of 1.6 billion. The cost of political unrest for Chinese Communist Party is too high. That could be one reason for Chinese aggression.

The first narrative fits the bill better because of the related developments. There was no reason for announcing a "make in India" policy when there is excess global supply. Not unless the Chinese capacity was suddenly going to be unavailable. And someone could pick up the slack. Indian PM Modi saw an opportunity in this and embarked on the picking up pieces. FYI none of the Chinese investments into Make-in-India have materialized. Foxconn which promised to set up an iPhone factory has backed out. Others are mostly European and american cos who continue on.

Is China a potent threat to US?

At present China is not a threat to the US. 

It does not have a wherewithal to pick up a fight with US. At least that is the public view. China needs at least 5 aircraft carrier units to be as aggressive as they are trying to be. It has none at the moment. Big daddy US has five major assets in Pacific including Okinawa. US also has two Aircraft carrier groups in Mediterranean Sea and Indian Ocean. India has two in the Indian ocean. 

China is a threat to India. It is an ally of Pakistan and has a long border-dispute with India. India needs to be wary and after fall of Soviet Union there is no regional counter-balance. India must ally with US. There is no other way. US knows this and promoting technology transfer to Indian defence. 

China is also a threat in South China sea. It is here that US is more worried. It is claiming more land and nautical area and becoming more assertive.

The least-expected strategy for China will be to challenge US. That will be a surprise and alter the military-power equations. For this it needs some greographical spread. By itself, China has tough geography which makes it difficult for it to create big trouble that could alter global balance of power equations.

The solution - A China circle

The Chinese circle comprises China, Pakistan, North Korea, some countries in Africa, some in Pacific Oceans including Laos. These countries have received heavy Chinese aid and China supports some questionable regimes in certain regions. Phillipines is becoming a China ally. The Burmese junta enjoys some support from the Chinese.

Clearly with this motley crew China cannot take on US or other major country. But what it can do is create strategic assets in these countries from where it can create trouble. The dirty work still comes to China's share. 

The tools

If China wanted to be a credible threat it should be building at least 10 Aircraft carrier units (including cruisers, frigates, destroyers, submarines, logistics ships). A better strategy would be to build them inland somewhere in Hainan (lake) or more likely in Sichuan (totally on dry land). Then one fine day plonk these in the sea. An event like that could alter the geo-political equations quite rapidly.

Yet such kind of shifting of balance of power is not possible easily. There are pretty unpredictable players in the mix.

The no-nonsense player -Russia

Russia is sitting on the fence. The Russian approach is just like in world war 2 - corrupt but away from the mess. It will take sides when it is forced to take sides. It has hinted that it may start supplying aircrafts to Pakistan and may have helped china build their J20 fighter which is copy of the F22 raptor. Russians are playing both sides as of now. They are cooperating with the West in Arabian geographies and counter-balancing them in Asian geographies.

Their problem is that they are too close to conflicts but not too powerful to force a resolution anywhere. Even Soviet Russia would have found difficult to contain China in its present state.

Pakistan the unpredictably-unpredictable player

The issue was easy to solve if Pakistan was not a long-term US ally. Because Nehru sided with Russians, Pak went to the US and US is feeling guilty of abandoning pak even when it housed Osama. If Pakistan was just another country in the equation, the US policy would have tilted pro-India by now and we would have been in a new stable-stalemate situation. The world would be chugging along by now.

The problem is that US would always help build Pakistani capability to counter-balance India. To the US, pakistan-India parity was the policy objective. US realised it late that Pakistan was playing double game. With US technology seeping into China and the inventory falling into the terrorist hands, US realised Pakistan is not a strategic asset but a mere pawn. It is China that was the new threat.

My guess

It is possible that the China is using the uncertainity related to US presidential election to test some destabilisation strategies. They see a window of opportunity and it expires on November with elections in US as the new president (even if Trump wins) will be briefed about all important issues and most likely toe the usual line. The uncertainty will reign till November as Obama may not be able make longer term commitments right now. So we have to sit tight for 1or 2 months. This is peak of crisis as we get to see. Then big daddy will be back in the saddle and world will be back to its normal stalemate situation. If this is indeed correct, then we should see a major policy decision by the new US President immediately upon taking office. It could be a pro-India change or opening of a full-functional base in South East Asia augmenting the one in Singapore and Okinawa.

In Sum

Something is definitely going on in the SE Asia / East Asian region. 

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Was European Federation possible at the end of 2008 crisis?

European Federation — a political integration of Europe, seemed to be one solution to the European Crisis. Then again others argue it was doomed to fail.

A political integration is an emotional, cultural and political process. By themselves, these each of these are quite challenging. Secondly, the budgetary/financial discrepancies between member countries had to be resolved in a Federal style — even before a federation came to being. Again a big issue. So was federal Europe possible? It was. In fact, “other things being equal” European people would have had no problem integrating — this time or a bit later. But other things were not equal. The central issue, I think, was the political situation.

The compulsion for political union came at the time of immense political turmoil. What started as a refugee crisis, quickly turned into a religious friction and today Europe sits at a major inflection point. Instead of expanding their identity into a bigger European identity, the citizens are faced with reducing it to exclude some religions, minorities and others-not-like-us. The reductionist forces are winning — radicalisation of european muslims, terror attacks, rise of IS and other thorny issues are shoe-boxing the European identity further and further. Without guidance of able leadership, the mindset will become closed. Hate will once again building up.

There was a massive leadership crisis. A great european leader would have focused on the migrants who were malleable and worked on them. She could have identified the refugees keen to integrate and empowered them to expand the integration process to their communities. Sadly, european leaders tried to shepherd their own population into a forced acceptance of refugees. Like a forced marriage, it was bound to fail. At such stage, we wish we had leaders of caliber. If there was an insurmountable obstacle this is it. The level of politics is shameful.

The fault is also with the people. The pedestrian politics of our times is narrowing our minds into seclusion and hate. That it is so possible in the time of internet and social media is the blight on our humanity. And past 10–20 years have brought the peoples of the world closer through the internet. Our choice, the one our politicians ignore, is to expand our minds. We need to remember that eventually the identities must expand and embrace all of humanity. To expansion, there is no end.

Similar circumstances faced the American a few hundred years back. They expanded themselves into a federation, bet on humanity and came to lead the world. The people of Europe face a similar test today. Sadly, there is no Washingtons, no Jeffersons and no Franklins. Or are there?

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Why are taxes so complicated?

Apple’s skirmishes with the taxman have brought the issue of taxes to the fore again. It all started with Warren Buffet’s assertion that he paid less tax than his secretary. We wondered what magic formula achieved that!

What is wrong with taxes? Why don’t we understand what is going on? Many reasons but mainly because tax is complicated — too damn complicated. I haven’t met a person who can mentally calculate his or her taxes even when they know their income precisely — not even with a calculator. These calculations aren’t even in the ballpark. So why is tax so complicated? Politicians and taxmen alike tend to confuse the debate with many terms and jargon.

What is a Tax?

Tax is actually a charge paid to the government for the services it renders — i.e. maintaining law and order, national security and general governance to cover the costs for that (such as salaries of army, police, judiciary, bureaucracy etc). It is also a source of finance for government investments say in infrastructure (think highways, dams, railways, space program etc). Taxes also pay for government expenditure on other things such as bailouts, promotion of job-creating industries, pensions, healthcare etc.

To pay for all these activities, government formulates a “tax strategy”. Tax strategy is combination of various taxes imposed on the public (citizens and non-citizen residents) to make up its income. It generally combines Direct and Indirect taxes, income and expenditure taxes etc. It may also include tariffs, duties, cess and fees under many different names.

Direct versus Indirect Taxes

Now government can take the taxes in two ways. Direct taxes are taxes those directly collected by the Government like, say, income tax etc. Indirect taxes are levied on the manufacturers or employers and these are then passed on to the citizens.

The direct and indirect taxes are important because of ease of collection. Indirect taxes are easier to collect but increase the transaction costs in the economy. Thus, if there are excise duties across the value chain, then such products have to be that much more competitive with respect to other global products just because of tax accounting.

Income Tax and Expenditure Tax

Government has at its hand two types of taxes. It can tax income at the hands of the earner. It can tax the consumer at the time of consumption. Notice that the timing the taxes are collected is different. That has an important bearing on this discussion. Between receipt of income and actual consumption is a quantum of time that can be controlled by the citizen. This has important bearing on the nature of tax government wants to impose.

When recessions strike the government is required to give a fiscal stimulus. When the tax backing such investment can be collected is now left to the consumer. After recessions typically, the consumers are reluctant to spend thus delaying the tax collection and putting government commitments to lenders at risk. An income tax, however, comes in as soon as income recovers. That used to create a big problem for the governments. However, with present technology and statistical analysis, governments need not have these

Expenditure tax has its advantages. It penalises those who consume more as against those who consume less. The argument against expenditure taxes is that incomes are higher than expenditures and thus tax collection is more. The counter argument is that expenditure tax leads people to invest rather than consume.

Tariffs, duties, cess and other fees

All these items are basically a charge on specified group of persons (natural persons i.e. people or legal persons i.e. corporations). These charges are meant to nullify some anomalies arising out of policies. Thus, if tax on cars is 30% on price of car, then if you import the car then you will also have to pay 30% “import duty” to bring you inline with those buying locally.

Why are taxes so complicated?

There are three sources of complexities in taxes. First is that tax law itself is complicated. Secondly, the constitution of the country creates complications that show up as complexity in taxes. Third type of complexity is result of Governments using tax laws and bending constitutional mandates to further their public policy.

Complications of Tax law

When you read the tax law, it is usually in two parts — tax rates and “interventions”. Interventions generally take the form of exemptions,deductions and tax breaks.

First part deals with tax rates. Tax rates by themselves may be different. Income tax rates are decided on slabs. For example, income below $20,000 may not be taxable, between 20,001 to 50,000 be taxed at 10%, between 50,001 to 100,000 be taxed at 15% and so on. It is easy to understand that the higher the tax exempt income, higher the tax rate others have to bear.

Exemptions are incomes or expenditures by law exempted from tax. Thus, income from renting a housing may be exempt. So when computing your taxable income, you don’t include the rent in it.

Deductions are amounts you invest in certain schemes that you can deduct from your taxable income. Thus, amount invested in pension plans may be deducted from your taxable income before tax is computed.

Then there is something called Tax-break. These are most notorious of all interventions. By this mechanism certain persons (natural or legal) can be made exempt from paying taxes if they satisfy certain conditions.

If taxes seem complex by now wait till you hear of this new type of complexity.

Constitutional complexity

The constitution in most countries grants the right to the government to levy tax. Now no country has one government, there are at least three sets of government in any country — city level, state level and national government. Constitution has granted each of them some tax they can levy. It is different for different countries but the principle is the same. These taxes taken together result in massive compliance exercise that is both time consuming and complex.

Governments overreach when they want to increase tax collection. So they invent some other thing to add to the tax burden adding to complexity. For example, if state or city government can tax land, national government may impose environmental cess on those lands which are not tree covered. It may be so that environmental policy is with national government, and land taxes with city government but now national government has got its pound of flesh out of land taxes.

Tax as an instrument of public policy

Governments, with all nice intentions, tend use taxes to further their public policy aims. For example, to promote job growth, they may want to give tax exemptions to various industries, tax breaks, they decide what the level of exemptions — what incomes are exempt from taxes. Or, say when they want to support home buying, then the government may give you deductions if you buy a house and lighten your tax burden. All these things combined make the tax calculations too complicated. These interventions are nothing but Government trying to influence society — they are using tax as instrument of public policy. It is wrong for many reasons.

The concessions given to further public policy have two ill effects. Firstly, they do not convey transparently what benefits were given to whom and thus it is underhanded. Secondly, they are wasteful as they cannot be pin-pointed to deserving persons. There remain, deliberately or not, various loopholes that creep into the legal draft of the law when it does come out. US tax code is rife with instances where industries on one side of the road has received tax-break while that on other side hasn’t.

I once heard a (fictional I think) story about Britain. In the 90s it was noticed that more Brits preferred to stay single than to marry. Naturally, the cable channels were quick to host debate shows on declining moralities of the Brits. It was then discovered that despite not marrying, Brits tend to stay with same partners. Quickly the hollow debates went after religion values of marriage etc. Ultimately it was discovered that this so-called moral decline was because of an innocuous clause in the tax code which imposed additional tax on married couples than two single adults. Talk of unintended consequences!

If government wants to subsidise certain industry let it do it by direct transfers or refunds. The problem with this argument is that citizens themselves do not accept it because government is quick to accept money but very lethargic when it comes to a refund. In corrupt countries there are palms to grease — if you are in India you have to grease the entire bureaucratic system and bureaucrat themselves.

The resulting of Complexities

The complexities in Tax system are not the only problem. They are genesis of the worse problems.

Individuals v/s corporates

There is a fundamental flaw in the tax system that treats income tax of individuals and corporates differently. The tax system believes that income of the corporation is its profits which is revenue less costs (crudely). In case of individual no consideration is given to expenses. Thus individual is taxed on revenues while corporates are taxed on profits. This difference has to go away. Now to be fair, individual tax rate is lower than corporate tax rate for precisely this reason. Yet, this difference coupled with tax avoidance mechanisms and other invented devices contribute heavily to discrepancy between the individual who cannot game the tax system and the corporate which can.

Tax avoidance

When the underlying system is complex, private parties more than government agencies are able to take advantage of the system. In the 2008 financial crisis, the average paying rating agencies were not competent enough to see through the complexities created by highly-paid bankers. Same logic holds for tax too.

With loopholes this wide, rich people with boundless ingenuity come up with schemes that help them avoid taxes. So people invest more in housing if rents are tax free. Such tax avoidance has created an industry of accountants whose only job is to avoid taxes. It is also in the interest of these accountants to keep tax codes unnecessarily complex.

When tax avoidance increases the burden falls on the poor who are ill-equipped to handle the complexities of taxes.

Transfer pricing — The bigger problem Tax evasion

One of the worst ways of evading taxes is by using transfer pricing technique. Let us imagine I make shirts under my company X Inc. and it costs be $50 to make the shirt which retails for $100. But I am based in a country where tax rate is 20%. So I make incorporate a different company X Ireland Inc. where tax rate is 1%. So X Inc. sells all the shirts to X Ireland Inc. at $51. And I pay tax on $1 at 20% i.e. 20 cents. Then X Ireland Inc. sells the shirts at $100 world wide. I pay 1% on $49 profit i.e. 49 cents. So my total liability is 49+20 = 69 cents. If I was doing business completely from my home country I would have to pay 20% of $50 i.e. $10 in taxes. This $9.31 is deemed to be legitimately avoided. I think not! This is tax evasion not tax avoidance. A small business cannot compete with this company.

This transfer pricing game is played at various levels. Corporates play countries v/s countries, pit state v/s state and city v/s city to extract maximum benefit. This benefits are solicited through industry bodies, professional institutes and other mechanisms of lobbying. Eventually tax payers are paying for this too.

Money laundering

The Global cooperation in taxes was brought about because of money laundering. All money laundering channels were discovered and they remain operational because of their use in tax avoidance / tax evasion. These networks have now been used to finance terror network which brought them into focus.

Taxes need urgent global reform

We need a simpler tax system that is easy to understand and easier to comply with. The complexities need to be resolved. Most of the countries in the world have a unified expenditure tax system (GST it is usually called). Such a system should be created for all taxes. We need to do away with exemptions, deductions and tax-breaks. The government aid, if necessary, should be given directly by cash transfer.

Second, we need international cooperation with respect to tax regimes. It is in the interest of all the countries of the world that tax is paid to the government to which it is due. There are efforts being put together to track and prosecute tax evasion through Global Forum on Transparency and Exchange of Information for Tax Purposes. This is a welcome initiative, though too many bureaucrats are discomforting. I hope it does not end up complicating the Taxes rather than simplifying and checking evasion.

If tax is a necessary evil, it is unnecessarily complex convoluted evil. May the Founding fathers should have put in a fundamental right that taxes shall be simple to understand and easy to compute and pay. Taxes should be simple and straight-forward. A healthy global tax system will empower our governments.

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