Practical analysis for investment professionals
27 January 2017

Weekend Reads from India: Thaler, Heuristics, and Capital Gains Taxes

Posted In: Weekend Reads

The direction of the US dollar is always a concern. More so now, in this year of change.

But the longer-term structural shift under way is the effort to establish new frameworks for commerce. Trade conflicts and protectionism may be back.

Will the revival of these approaches help address the growing inequality that globalization has so far failed to counteract? Welfare economics, Milton Friedman’s negative income taxes, and a universal basic income (UBI)” are among the other policy measures that are attracting renewed interest. Proponents from across the ideological spectrum and the developed and developing worlds have emerged to voice their support.

The question is: Which policies will governments take up?

We will know next week about the government of India’s plan for UBI and other fiscal policy initiatives. India’s finance minister, Arun Jaitley, will present his fourth federal budget to the Lok Sabha — the lower house of the Parliament of India — on 1 February. This presentation is a widely followed event — and for good reason: Budgetary announcements have played a vital role in charting India’s economic progress.

India’s 2016 currency ban, aimed at driving black money out of the economy, has been a mixed bag thus far. On the negative side, the cash in circulation is still at 47% of the pre-ban level and weaker segments of the economy have been under severe strain. The expectation, therefore, is a pro-growth budget that supports all segments of society.

India’s long-term capital gains tax policy is another area where there is potential for significant change. Capital gains taxes on listed equities held beyond a year are currently tax exempt in India. But this is likely to be under review. Unlike the United States, the United Kingdom, and South Korea, among other countries, India has yet to implement the principle of horizontal equity in capital gains taxation. In addition, equating “long term” to a one-year period is not just an issue of semantics. Framing and the incentive to divest beyond a year is enough to bias market players toward short-term decision making. Consider this: India’s annual retail trading contribution is about 40% — significantly higher than the developed world.

In their book Nudge, Richard Thaler and Cass Sunstein highlight the role “choice architecture” plays in decision-making dynamics. Size, complexity, and behavioral biases are among the major factors that influence all decision making. But even in the face of complexity and size, the authors demonstrate how behavioral biases and heuristics can sometimes be gainfully used to influence important choices. For example, as a result of the French government reversing one opt-in rule, effective 1 January 2017, all French citizens, by default, have become organ donors.

Thaler and Shlomo Benartzi’s Save More Tomorrow program is another example of policy nudges that can induce significant economic change.

Both global and local policy shifts are bound to influence the speed and depth of capital flows, and it’s important to be mindful of the unseen behavioral changes that accompany all policy shifts.

Some of the other stories I found interesting are listed below. Happy reading and enjoy the weekend.

Global and Indian Policy

Behavioral Economics

Investing

Fun Stuff

If you liked this post, don’t forget to subscribe to the Enterprising Investor.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Christian Mueller

Tags: ,

About the Author(s)
Shreenivas Kunte, CFA

Shreenivas Kunte, CFA, is director of content at CFA Institute, where he contributes financial market insights about India and the developed world. Previously, he taught at and managed SP Jain’s Trade and Applied Research lab, which he helped found. Kunte also served as a country trading strategist at Citigroup’s Tokyo office. He actively contributes to the development sector in India and is an external research scholar at the Indian Institute of Technology Bombay.

Ethics Statement

Beyond the easier to understand, important codes of conduct, “Ethics” for me is awareness; an endeavor for right thought and action.

Leave a Reply

Your email address will not be published. Required fields are marked *



By continuing to use the site, you agree to the use of cookies. more information

The cookie settings on this website are set to "allow cookies" to give you the best browsing experience possible. If you continue to use this website without changing your cookie settings or you click "Accept" below then you are consenting to this.

Close