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I wonder whether American economist Professor Arthur Laffer has ever visited Mumbai or picked up a smattering of Marathi, the preferred language of the Shiv Sena-led coalition government in Maharashtra? I reckon the answers to my unusual questions would be ‘no, and no’, but equally, I may have tickled your curiosity enough for you to ask, ‘what’s this guy up to, has he lost it?’.
So, let me explain.
Professor Arthur Laffer is a renowned American supply-side economist, with Yale, Stanford, Ronald Reagan and Donald Trump on his resume. One fine evening in 1974, he was at dinner with Dick Cheney, Donald Rumsfeld and Jude Wanniski at the Two Continents Restaurant at Washington Hotel. While Laffer doesn’t recall his historic flourish, Wanniski insists Laffer drew a distorted bell curve on a napkin to convince his audience that President Gerald Ford’s tax hikes would fail, since beyond a point of inflexion, tax revenues fall even when tax rates are increased.
Laffer’s napkin theory was neither unique nor original. It was propounded six hundred years earlier by Islamic Scholar Ibn Khaldun in Muqddimah, and later endorsed by such worthies as Adam Smith, John Maynard Keynes and Andrew Mellon. But the legend got fastened on Professor Laffer that fateful evening.
Several academicians have refuted the Laffer Curve, but that hasn’t diminished its sexy appeal for conservative politicians — remember Donald Trump’s big slash down to 21 percent?
So far so good, but what’s cooking between ‘amchi’ Mumbai and the Laffer Curve? Well, if Professor Laffer was looking for a stunning vindication of his theorem, he’s got it from the property market in the megapolis. On 26 August 2020, the rulers of Mumbai did what few statist Indian governments do — they hacked the stamp duty on property transfers to kick life into the COVID-dead real estate market. The 5 percent rate was brutally trimmed to 2 percent until 31 December 2020. The impact was magical:
The state’s finance minister couldn’t stop crowing: “It has put our economy back on track. In four months, registrations are up by 48 percent and the revenue by Rs 367 crore as compared to the same period last year”.
FM Nirmala Sitharaman is all over television asking all and sundry to give her adventurous ideas because “this union budget is going to be the most important one in 100 years”. I couldn’t agree more. It’s critical to reboot a comatose economy. But the ideas she seems to be getting are more of the ‘same same’:
In short, dear minister, be a tiny bit more aggressive, but stick to the tried, tested, and tired playbook.
I violently disagree.
This is the time to think out of the box, and perhaps invite Professor Arthur Laffer to dinner at the Golden Dragon restaurant at Taj Colaba, hoping he would draw another bell curve on the napkin.
With the economy contracting 8 percent now but bouncing 10 percent next year, it will reclaim the values of FY 19-20. In fact, FY 21-22 could be identical to FY 19-20. So, if we were to work on the real numbers of that year, we would be pretty accurate about our math next year:
Dear Finance Minister Sitharaman, this is the time to shed convention, dogma, fear, and stasis. Go for broke. Listen to ‘fiscal heresy’. Cut taxes. Yes, I’ve exaggerated for impact, but the principles are inviolable. If 50 percent is a tad too heretical for you, jump start with a 33 percent slash. If you want to hedge your bet, try it for a limited six-month window (à la the loan moratorium), not the whole year. But do go ahead — surprise and delight yourself!
(At The Quint, we question everything. Play an active role in shaping our journalism by becoming a member today.)
Published: 07 Jan 2021,07:11 AM IST