Reducing taxes to boost investments is a myth, says Abhijit Banerjee

Countries from China to India to Indonesia are slashing taxes for businesses to spur growth amid a gloomy outlook for global economic expansion.

Business Standard : How do you spur demand in an economy? By raising direct taxes and distributing the money among the poor, says this year’s winner of the Nobel prize for economics.

Reducing taxes to boost investments is a myth spread by businesses, says Abhijit Banerjee, who won the prize along with Esther Duflo of the Massachusetts Institute of Technology and Michael Kremer of Harvard University for their approach to alleviating global poverty. “You are giving incentives to the rich who are already sitting on tons of cash.”

Countries from China to India to Indonesia are slashing taxes for businesses to spur growth amid a gloomy outlook for global economic expansion. The International Monetary Fund this month made a fifth-straight cut to its 2019 global growth forecast, pegging it at 3 per cent.

“You don’t boost growth by cutting taxes, you do that by giving money to people,” Banerjee said in an interview Monday, suggesting that cash in the hands of the poor will drive consumption. “Investment will respond to demand.”

China earlier this year rolled out tax cuts worth $280 billion on personal income and corporate profits, while India surprised with a $20 billion stimulus, taking its corporate tax rate to among the lowest in Asia. Indonesia also plans to lower tax on companies to 20 per cent from 25 per cent.

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MIT Professor Abhijit Banerjee spoke in New Delhi where he was promoting his book ‘Good Economics for Hard Times.’

Last year, US President Donald Trump unveiled a $1.5 trillion tax package, and has promised “very substantial” tax cuts in 2020 for “middle-income” Americans.

It’s the widening inequality in developed countries such as the US that has angered people and pushing the world into a trade war, Banerjee said. “It is unbelievable that in the name of growth you have allowed inequality to explode to this point.”

Do the winners of 2019 economics Nobel focus too much on micro welfare?

Immigration and growth would help more than addressing the winners' 'manageable questions.'

Business Standard : The Royal Swedish Academy of Sciences will award the 2019 Nobel Prize in Economic Sciences to Abhijit Banerjee and Esther Duflo of the Massachusetts Institute of Technology and Michael Kremer of Harvard “for their experimental approach to alleviating global poverty.” The award reveals a deepening fault line among economists about how best to fight poverty.

What’s striking about the award is that the Nobel committee gave it to the three economists specifically for addressing “smaller, more manageable questions”—such as how to improve educational outcomes and child health in poor countries—rather than for big ideas. Mr. Banerjee and Ms. Duflo (a married couple) explicitly reject thinking about big questions in their 2011 book, “Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.”

To be sure, breaking down big issues into smaller questions can sometimes allow quicker and more-direct solutions to unwieldy problems. Yet in the case of global poverty, economists actually do have pretty good ideas about how to fight the problem on a macro scale. Namely, immigration and economic growth, which are by far the most reliable ways to improve the quality of life among the world’s poor.

The relative narrowness of the scope of this year’s winners’ work is owed in part to their method of analysis: randomized controlled trials. Such trials allow economists to reduce the uncertainty of economic analysis by eliminating the possibility of self-selection. Yet they are also usually small in their scope, as the subjects typically must be organized directly by the researchers.

In the 1990s, Mr. Kremer and his co-authors used randomized controlled trials to estimate the effects of providing more textbooks to students and giving flip charts to schools in western Kenya. Although more textbooks improved the test scores of the most able students, they didn’t improve average test scores. Flip charts had no effect.

In another study of Kenyan schools, Ms. Duflo, Mr. Kremer and a co-author examined the effect of hiring contract teachers to supplement teachers in the civil service. Their idea was that contract teachers would be more effective because their incentives were better. If they didn’t perform well, they would be less likely to be renewed. Civil-service teachers are permanent, and it’s hard to fire them.