EP-119: Bidenomix – Tax Peter to Treat Paul? US is India’s #2 Crude supplier, India #4 FX Reserves

Sree Iyer: Hello and Namaskar. This is episode number 119 of Daily Global Insights. And I’m with Sridhar Chityala. It’s the 16th of March 2021. We have a lot of breaking events for you today.

The first one is that India surpasses Russia to become the fourth largest in FX reserves for the country’s much-needed strategic advantage at 580 billion dollars.

The United States moves to number two as the leading supplier of crude pushing Saudi Arabia to number four position.

The White House weighs tax hikes to pay for beyond the 1.9 trillion stimulus package.

Taliban is going to be attending the Russian hosted Afghan Summit on March 18^th.

And Wall Street reaches record highs with optimism around the economy reopening from the pandemic.

Now on America news, the White House weighs tax hikes to pay for beyond the 1.9 trillion stimulus package. Sridharji, yesterday we talked about this just a little bit and you said that they were going to tax corporations, individuals with high net worth and so on and so forth, but the numbers don’t come up to 1.9 trillion, isn’t it? I mean, is there any other hidden tax hike here?

Sridhar Chityala: No, I think the 900 billion dollars of last year, the last one that came in December plus the new 1.9 trillion dollars stimulus that is going out will not have any tax increases to fund. It is factored into the balance sheet of the government, but there are other programs such as infrastructure, paying for green Accord, normalizing some of these benefits that are going in as part of the pandemic into your regular program. People are saying if that has to be done, then, there has to be a mechanism to find revenue sources. So what we are hearing right now is that some of the considered tax scenarios. This is coming from Biden’s office or Biden’s team, which includes a tax slab, a tax hike for people earning greater than $400,000 is one. The other thing that is being considered is to increase the corporate taxes from 21 per cent to 28 per cent then also to have capital gains limits set at 1 million to have a higher capital gains rate for those earning through capital gains at 1 million dollars. So these are some of the numbers that are being floated around. There is also if you recall a wealth tax, which is named for those who have a household net worth of greater than 500 million dollars up to 1 billion dollars one per cent wealth tax and those who have a house household net worth of greater than 1 billion to have a 2% wealth tax. There is also the considered view that corporations that have tax benefits overseas there may be a flat levy of 10% tax but, these are the additional things. Today, the four-line items that are propping up for this $400,000, the 1 million dollars capital gain the 21 to 28 per cent corporate tax and potentially looking at the wealth tax.  These are the kind of the four specific line items that are coming up as they weigh the next stimulus. As you can see Nancy Pelosi has been saying, the next is coming, we have to have the infrastructure. But, there is also this program besides the infrastructure to normalize what is being sent as pandemic payments into a normal kind of benefits flowing through to the lower income or lower strata of the society. One specific item that is being considered as a platform is this 250 or $3,000 per year tax credits for those between 6 and a 17 per child in the family and the other one being $3600 or 300 per month for children below 6, these are the considerations.

Sree Iyer: Now, I’m seeing now for the past few years, sir, few administrations as a matter of fact, one Administration goes left the other one corrects and goes right. So, essentially the country is coming back to the same point. These tax reductions were seen as a good thing because there is no other way to tackle the tax inversion problem that existed amongst the Fortune 500 companies. Today, if you look at the Fortune 500 companies 99% are I think are now incorporated outside of America. And now, if they raise the rates that are going to stay the same at least there was an outside chance that they would come back in. What Apple and other companies are trying to do is to see if they could get a one-time rebate of five per cent tax on all the money that was sitting abroad so that they could bring it back into the United States. And well they did this once before and they did not live up to their promises which is probably why the government did not do it, the Trump government did not do it. But now again, I think this is like resignation on part of democrat that you know, no matter what, these people will not reincorporate back in the United State we might as well tax them at a higher rate. So this is just my two cents, I could be wrong about it. But as an overall strategy where the world is coming to single-digit corporate Taxation and almost no personal income tax you take Dubai for example, any percentage of tax is you know, it’s going to be counterproductive because there are other options and I don’t know what a solution to this is. Maybe America should also attack consumption rather than income. I don’t know. Maybe that’s where we will go in the time to go any thoughts on that, sir?

Sridhar Chityala: Yes, I think that I just want to delineate some of the points that you had made. The amnesty that you’re referring to is for bringing back the capital that has been retained overseas. It is close to about three trillion dollars of capital. So that’s really not that’s a one-off amnesty to bring the cash that is overseas back into the country, so, for the deployment of capital expansion type of programs, expansion programs that require Capital so that’s one part of it. The one that is Biden is focusing on is not the repatriation of the capital but he wants to do your permanent levy of taxes so that there is a convergence around the gap that we alluded to if you see that the spending has increased. It will be increased over 10 years or 20 years by almost five percentage points, and we had stated that the revenue only increases by two percentage points already with a gap anything between 500 billion to 900 billion dollars in terms of the deficit to even balance the budget on an annual basis. We also saw that in the projections that we gave yesterday that 14% of the GDP was the deficit 10.3% without adding new debt was the deficit to GDP it normalizes to about 5% Then goes up to 8% eventually by the time it gets to 2050 goes to 13 per cent of the budget deficit is already fixed, of which 8.6% is nothing but the interest charges on the debt. So, they have no mechanism unless they actually start increasing the revenue and the only pieces of revenue that they can increase on tax revenues effectively only less than 10% of the revenue comes from the corporate taxes. The vast part of the other comes from individual payroll taxes and then of course the small business sorry, individual taxes personal taxes, and then you have these small business payroll taxes that flow through. So, they have a huge problem in terms of going on spending money without a mechanism of determining where the income is. Now, you have to understand that we got floodgates open, illegal people migrants coming in. We already have 9 million unemployed and close to 12 million illegal migrants sitting within the nation and for the country to roll out all these social welfare programs for these 20 to 30 million people. There is no mechanism within the balance sheet in terms of funding it. So this is the fundamental difference between the Republicans and the Democrats. Republicans say that any budget that is to fund the Nation is for its citizens and must come from their tax income whereas the Democrats are saying, we are compassionate to anybody who comes in and all these illegal people have to be harmonized and as a one-off and new people coming in. They need to be looked after etc etc., So, this is the fundamental difference between the two kinds of regimes the reason why we grew for the past four years is because of the tax concessions that were given to the people of the United States where the taxpayers that in turn translated into people going and spending money besides the low energy prices. Remember, we also have a minimum wage going up and we’re going to have this fracking and ban on the energy. So the oil prices are expected to kind of go up. So there’s a whole swag of problems that the Democrats are looking at without really adding the numbers and what you are seeing is the snippet of the tax rises.

Sree Iyer: Well, they’re causing trouble to themselves. And I don’t know where this is going to end. I think the stock market also is going to smell the coffee just like the way you and I are smelling it. So we’ll see how it goes. Trump judicial appointees give positive hope to revoke the flood of executive orders with sweeping changes. So, Trump had his hand in selecting a lot of people in the judicial report, especially even in Supreme Court, I believe now, it’s a conservative majority and does that mean that some of these things could be rolled back?

Sridhar Chityala: Well, there are three tiers, one is the Supreme Court, we had at three judges. Then, you have the next which is the district courts. Well, I mean pretty close to 400 people were added by him. And then you have the lower district courts, where we had close to another 300 people. So he has added three-tier close to 700 judges in tier 1 and tier 2 District as well as the lower courts and then you have three in the Supreme Court.

So the belief is that many of these programs seem to be rolled out with no due consultation and all going through the executive orders. They believe it will be challenged in various States and so the rescue could come in terms of implementing. Some of these far-reaching programs on immigration, payouts, social welfare programs, funding the green cause, minimum wages, ban on Keystone Pipeline, ban on new drilling and new leases to Offshore for the energy expansion program. So there’s a whole series of activities that he has stopped and that could be challenged in various courts, in States like Texas, South Dakota, North Dakota, Mississippi, so quite a few states could challenge those rulings because of direct consequence of the revenue. The third point that you made is, we do have a consumption tax and that ranges between 6% – 8% depending on the state where you are. For example in New York, the consumption tax is about 8.4%.

Sree Iyer: Changing eliminating filibuster will be on the table if Republicans keep voting ‘No’ says Chuck Schumer. Non-citizens to register to vote under Democratic Bill, conservatives won. This is something that is very alarming, sir.

Sridhar Chityala: I think we talked about the filibuster, which is at some stage they have to say ‘okay, we can only do or we can do three if there are seven bills and if all the seven bills are filibustered then there’s just going to, it’s not constitutional provision, it is an implicit understanding between the two parties. So what you’re going to witness is that’s why these guys threw in a whole swag of bills that’s on the filibuster. As far as the non-citizens are concerned, this has been the bone of contention constant all the time that you don’t need a driver’s license. Anybody who gives a basic ID is adequate, non-citizens can vote etcetera. So Democrats clearly see the way to outwit the Republicans in many of the states, and we talked about the redistricting that can occur because right now if you recall there was a dispute between whether these people should be included in the census or whether they should not be included in the census. Republicans and President Trump said they should not be included in the census and Supreme Court held the ruling in his favour. Now that is being challenged by the Biden Administration, where he said, no these people are here, they are part of us and they should not be disenfranchised. If you recall, they said anybody, previously people who are you know felons, who are gaiety of some offence or imprisonment, there’s a certain category that was omitted from participating in the elections, so the Biden administration is saying, no everybody irrespective of what his denomination is should be voting for the election. To your point, it is quite worrying.

Sree Iyer: The situation on the Mexican border worsens as politicians fight over labelling it as a crisis or not. If you label it as a crisis what happens, what changes happen?

Sridhar Chityala: Nancy Pelosi will release the next stimulus bill.

Sree Iyer: Deb Haaland said to be confirmed as the first Native American Cabinet member. That is surprising because they are the original inhabitants of this country. Let’s move on sir, we have to cover much ground.

India’s news; the Ministry of External Affairs informs Rajya Sabha that India is engaged with West Asian countries such as the United Arab Emirates, Saudi Arabia, Qatar, Oman to help Indians who have lost their jobs due to pandemic. India invites applicants for the second phase of PLI programs for large-scale electronics manufacturing. Indian Railways execute its most challenging project world’s highest Rail Arch Bridge over Chenab in Kashmir. BRO opens the road ahead of schedule allowing the induction of troops at Baralacha La Pass at an altitude of 16,043 feet. It is one of the highest mountain passes in Zanskar ranges on Manali – Sarchu Road and connects Lahaul District in Himachal Pradesh with Leh in Ladakh. So this means it is a second way to get to Leh?

Sridhar Chityala: Yep and fast movement of the troops.

Sree Iyer: Yes. Yes, and it’s very impressive at the altitude at which they have pulled it off.

Sridhar Chityala: Well, I think that the reasons why we continue to highlight many of the things Sree Iyerji is, this is the channel you hear the news that you do not hear in the mainstream media. So there’s a lot of good things that are happening in India that is positioning continuing to advance the journey of India on various fronts. But most of the media seems to be focused in India around all the nitty-gritty on all the local stuff which seems to have neither intrinsic economic value nor educational value or intellectual value. It seems to be more entertainment around how some of this political football is being played locally. When you look at some of the things that we talk about, we talked about foreign exchange reserves what are their implications, we are talking about the reduction in the imports, we are talking about how the Ministry of External Affairs is working with various governments outside and saying a vast number of Indians who are employed who are relying on the livelihood, ‘hey, we have helped you with vaccines and other things. It’s now time for you to take some of these people back.’

Then, we are talking about some of the engineering marvels that are being done in connecting a railway line around the Chenab river at the highest, actually, we don’t have the video, but we should see whether we can secure the video. You can actually see this particular girder coming up at such a huge attitude, the largest sky girder that is being used to connect. There is another bridge, I think this may be in Rameshwaram where the train is going up – in the upper tier and the bridge is being built simultaneously in the lower tier. The objective is to demonstrate India has come a long way in terms of its ability to execute these types of projects. Again, we talked about the BRO – Border Roads Organisation which is building better roads, so these are the guys who are building Baralacha La Pass which is connecting Himachal Pradesh to Leh through an alternate route for the faster movement of troops in that kind of attitude. So it just demonstrates that there’s a lot of good things that are going on in the Indian region around the infrastructure. Also, India has a 17% reduction in imports as a result of this PLI program where many of the things are coming in as part of Made In India or manufacture in India type of programs.

Sree Iyer: In Asia news, after the Myanmar coup, the Myanmar death toll crosses 120 as several Chinese owned factories are torched. So somewhere the people seem to think that perhaps the Chinese had something to do with the coup. What are your thoughts?

Sridhar Chityala: Well, usually the Communist regimes have played a significant part and they are very close to Junta. If you recall many of the capital infusion, as well as the commercial programs which resulted in the setting up of the factories and industries in Myanmar, as a result of the money of the Chinese. So there’s a perception at least in the minds of the people that the Chinese are behind supporting the Junta which is the reason why they have dismissed a Democratically elected government. One of the funny things in this is that the Taiwanese fellows have started to put up a flag to say that we are Taiwanese, not Chinese so don’t burn our factories.

Sree Iyer: Oh, I see that’s interesting. In Europe, the Middle East, Africa news, Iran releases first images and film footage of what it said as the new revolutionary guards’ arms base with cruise and ballistic missiles and electronic warfare equipment. The Taliban will be attending the Russian hosted Afghan meeting that is starting on the 18th of March. Germany, Italy and France join Holland in halting AstraZeneca. In markets, Wall Street reaches record highs. Where is this going? And this is one of the interesting things about news, people will never talk about how much richer you got because Wall Street hit a new record, but one correction and they’ll give a number and say something lost so many trillions in its valuation. This is a very interesting way. But today a lot of us are richer, aren’t we?

Sridhar Chityala: Well, I think that everybody has 401K balances that have really gone up. Most of the vast part of America have a 401k that is their retirement program. So people have seen an uptick in the balances. There are 2 profound changes that have occurred which generally people don’t speak about. The second is the low-interest rates have helped many people to structure their mortgages and there has been a consistent pattern of growth in householder ownership. Close to 500 billion dollars of loans were refinanced, 484 billion dollars was refinanced in 2020. So the two points that you are alluding to is the household wealth has increased and we indicated that as in January the figures released was the net household wealth was around, I’m talking about dispensing the billionaires, was around 4 trillion. This is personal household wealth, but billionaires household wealth. Their income to spend was up 2.4% and was around two trillion dollars. These are staggering numbers when you have money put into your bank accounts $1,600, $2,000 per household minimum put into the bank account. You have $250 or $300 per person. You have two kids $500 or $600 put into your bank account that adds a significant amount when you have 110 million households in this country.

Sree Iyer: Yes, indeed, and that brings us to a close on today’s news, and we’ll be back again tomorrow same time same place. Thanks for joining. Do subscribe to our Channel and please donate to our cause. Once again namaskar Sridharji, and we’ll be back again tomorrow.

Sridhar Chityala: Namaskar, and we’ll be back tomorrow and have a wonderful day.