Markets have been buoyed by a buzz about further tax cuts coming to revive growth. Last month saw the bold move to cut headline corporate tax rate by eight percentage points, to 22%. Given that there is now a stark difference between corporate tax rate and the top marginal tax rate of almost 43% for personal income, there is indeed a very strong case for cutting personal tax rates as another booster shot.
Citing the example of countries with high income tax rates to resist this change is cruelly sophistical, when they have a record of using tax monies much more productively or of providing good public education and healthcare and pension, whereas Indians have to fund such services themselves.
There are also concerns about the fiscal impact of further tax cuts. But surely the overarching imperative is reviving growth, which in any case is necessary for sustained fiscal health too. The more the world slows and grows protectionist the more India’s growth has to be domestically led. To the extent that a large part of the current slowdown can be traced to a sharp dip in consumption, an income tax cut can act as a demand-side stimulus. Increasing the disposal income of taxpayers can boost the economy.