Which way is the right way?

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By Tensing Rodrigues

If you think that Trump’s fight with China is the most important thing happening to US at the moment, you may not be exactly right. The conflict within is perhaps what is going to affect the future of US the most. The US is through a test and we take interest in it because the result could be of use to us as well. Does the US work better as a low-tax, low-regulation place in which government makes little provision for its citizens or as a high-tax, highly regulated one in which it is the government’s role to tackle problems?

Well that is US’s business to decide. Agreed. But it’s less than a month since we filed our income tax returns. And this question of tax has definitely bothered us: Do we really need to pay so much tax? That is really the question that US has been called to answer.

Fortunately they have an opportunity to try it out. The experiment is called Texafornia : Texas v/s California. California, with 40m inhabitants, and Texas, with 29m, are the states with the largest populations, with more than one-fifth of Americans living in them. They also have the biggest economies. If they were countries, California would be the fifth largest economy in the world, just following Germany; and Texas would be the tenth largest, just ahead of Canada.

The two have been following two different models of economy: Texas a low-tax, low-regulation economy in which government makes little provision for its citizens. California is a high-tax, high regulation economy in which it is the government’s responsibility to solve all problems. That is the choice we have before us too: Do we want our government to take lesser responsibilities, take away lesser by way of taxes, and give us sufficient freedom to work hard to build our country? Or do we want our government to be our mai-baap, take away more by way of taxes and solve all our problems for us?

Let us see what this means to us as individual investors. Let us suppose you have an annual taxable income of Rs 10 lakh.  At the AY 2019-20 rates you will have to pay Rs 1.12 lakh.  Let us suppose the tax rate was half of this. Then your tax liability would be Rs 56, 250, say Rs 56,000. This Rs. 56,000 would be available to you to invest, in a financial investment or your own business. Let us suppose that you can earn a return of 15 per cent in such an investment.

Now let us compare the two scenarios of high tax and low tax – in a specific situation : medical expenses. Let us suppose you can get free medical care under the high tax regime; and no medical care under the low tax regime. If you are under the high tax regime, you will have to incur no medical expenses in the event of your illness. Under the low tax regime, you will have with you Rs. 56,000 with you to meet the medical expenses during the first year. During the second year you will have Rs. 1,20,000. During the third year you will have about Rs. 2,00,000. Now ecide which will you prefer ? Both the alternatives have pros and cons. If you fall sick every year, and end up incurring medical bill in excess of Rs. 56,000, you stand to gain under high  tax regime, as you will get your medical expenses fully covered year after year. But if your yearly medical bill is short of Rs 56,000, you stand to lose under the high tax regime. Or if you do not fall sick every year, you stand to lose under the high tax regime.

You can do this comparison using different welfare services like subsidized gas, subsidized transport, free education, etc. Income left in the private hands may also be channelized into capital building, leading to growth in the economy. Compare that with the capital formation through taxes and government expenditure. Which is more efficient and fair? This is the question that is addressed by the Texafornia experiment.

The author is an investment consultant. Readers can send their comments and queries to [email protected]