Sovereign debt crisis and tax collections

A poor system of taxation denies the citizens the services they have a right to expect from their government. But the crisis, both past and potential, have illustrated that the failure to collect taxes can have much broader effects on markets far from home

The origins of a sovereign debt crisis are simple. Creditors are worried that the country won’t be able to pay them back. One of the main reasons for their concern is the recent fashion for socializing private losses, often from the banking system. This was the main problem that got both Spain and Ireland got into trouble. They attempted to bailout their banking systems after a housing bubble. In the process they endangered their national credit, which until that time was comparatively good. But if you want to bail out a financial system, you have to have the money to do it.


The US has had its sovereign credit rating downgraded for ignoring the size of its debt. But the US has one major advantage as far as its creditors are concerned. Taxes in the US are relatively low. The total tax take in the US is about 27% which is much lower than the OECD average of 34%. In addition to lower taxes, the US has an effective tax collection system. Its tax service, the IRS (Internal Revenue Service) is both feared and loathed. Famous criminals like Al Capone did not go to jail for countless murders, they went to prison for the failure to pay tax. So if the US wanted to take care of its debt or bailout failing institutions, it could easily do so. Other countries are not so fortunate.


Read William Gambles take on Unintended consequences of central bank policies


Usually the only people to suffer from poor enforcement of tax systems have been citizens of the country in question. A poor system of taxation denies them services they have a right to expect from their government. But the crisis, both past and potential, have illustrated that the failure to collect taxes can have much broader effects on markets far from home.


The poster country for this problem is Greece. The Greek government’s tax revenue is about 52 billion euros a year. It is estimated that they lose up to 45 billion euros annually due to tax evasion. So paying its debts became questionable.  Still Greece collects 33.2% of its GDP in taxes. This is almost twice what many emerging market countries collect.


The recent hunt for yield has made all sorts of emerging market debt popular. Most emerging market countries have, at least in theory, lower total debts. They have also borrowed extensively in their local currencies, so they have avoided the problems they experienced fifteen years ago in during the Asian crisis. But this does not mean that they are out of the woods.


Almost five years of ultra loose monetary policy and inflows of capital have created a mountain of debt, especially in the last year. Emerging market companies and banks issued bonds worth more than $300 billion in 2012. The pace of issuance in 2013 is more than double 2012. Much of this debt is in dollars. So the debts of these companies, especially financial institutions, are subject to currency risk and may need bailouts. But do emerging markets have the cash?


Want to know how stress American municipal bonds are? Click here to read an analysis by William Gamble


Emerging markets, especially in east and southern Asia, have real problems collecting taxes. Their revenue is usually less than 20% of GDP. In China this is especially acute, because of the way the tax is distributed. Most of China’s tax laws date from 1994. This legislation causes severe distortions. Local governments account for over 80% of public spending, but receive only 45% of revenues. They have made up the difference either by selling land use rights or by loans. Recently they have turned to the unregulated social financing in addition to their bank loans. Social financing has increased almost 500%, from 2.93 in 2011 to 15.76 trillion yuan today.


Although other Asian economies are not floating on debt like the Chinese, their tax take is hardly any better. Indonesia’s revenue is as low as 12%. India’s tax revenue is about 18%, the lowest of the BRICs. India’s national sport is not cricket, it is tax evasion. It is a country of over 1.24 billion citizens, but only 32.4 million of them or about 2.6% pay income tax. It is estimated that India loses over $314 billion over 16% of its GDP to tax evasion. With so few people paying tax and so many people avoiding it, providing proper stimulus or bailing out failing institutions like the smaller state banks becomes problematic.


Tax evasion is not limited to India. A recent study found that about $21 trillion is hiding in financial institutions located in tax havens. In countries like Brazil the problems of tax evasions have more to do with the complexity of their tax systems which provides a plethora of methods to avoid tax. It takes over 2,600 hours just to figure out the amount of taxes in Brazil versus 176 in OECD countries. Under this system it is often just easier not to pay taxes at all.


Any creditor knows that a safe level of debt for a borrower depends not just on the absolute amount of the debt but also the ability of the debtor to repay. As the economies of several emerging market slow, the cash flow issue may force investors to re-evaluate where the precise risks they have taken.


Other stories by Gamble


(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)



Vinay Joshi

4 years ago

Hello William,

How are you? I’m fine. Will you answer this post? Or should I write to you separately?

In the first place the views should be for ‘smart tax collection’!?

You have smartly strayed from ‘fiscal cliff’ & ‘PIGS’ in totality as EU constituent.

Was $ trillion coin minting an absurdity? Hypothetical, diffused but!

I was amazed EU, awarded Nobel! Your take.

There has to be an effective taxation, balanced fiscal.

Can we talk of tax, debt ratio to GDP?

The tax GDP ratio of US is lowest in OECD with debt exceeding its GDP.

The only country, with EU can leash global recession.

The tax revenues in developing countries if not higher can be a concern.

But when Spain 37.3 above OECD average 35, they require bailout!?
Non tax revenue also contributes.

A reformative tax code ensures compliance less complicated which is not practiced.

I’m against the dogma of increasing taxes but in a situation of ‘fiscal cliff’ one has to balance it.

[As a matter of fact US Prez’s in second term are least bothered about fiscal policy BUT, BUT, Obama is an outstanding a persona. After two term restriction, the same party never returns, which possibly Obama may prove it wrong with Hillary at the forefront. Not Condoleezza Rice.]

India was never touched or affected by Asian crises; also due to prudent Central Bank & its stringent overview, was insulated from US-2008 crises.

S&P episode is not in the ambit of this post.

A pertinent view is that tax policies should evolve with changing economic situations.

US, robust tax implementation system in place is overlooking healthcare & social security & no job’s creation.

What is major advantage of US vis-à-vis its creditors? Fedral!?

Today if PRC – China, threatens / decides to liquidate SOME OF its US$ Trillion Treasury Bills, highest in the world, & OPEC countries decide to denominate say in Euro, if not Riyal, US will go for a tailspin.

[No doubt as per G7& ongoing G20, currency tool can’t be unleashed as economic warfare, irrespective of exchange parity.]

China & India have same 17 tax GDP but with a difference.

William, US with its most efficient tax system, people clamoring for benefits?

Why US had to pressurize EU authorities, Swiss in particular, to get hold of its tax evaders?

Who are the culprits in LIBOR? Does it not affect world economy?

You’ve cited Greece, foregone a conclusion, I’m citing poster country US. Talk.

William, if yield in emerging markets is attractive how much is put in? As global financial strategy.

To have global economic & fiscal balance, get out of recessionary trend, it’s US & EU, OECD to spearhead with able BRIC.

What’s the outcome of G20 summits till now? In Moscow, there’s talk of exchange parity, deflation, what IMF MD has said?
RBI Governor has stated there’s push factor, spill over impact of easy monetary policy.

WTO, Doha round no outcome, US impediments always including climate change.

So, taxation to sovereign debt is different path, not only prescription.


S&P ends licensing pact for NSE indices

Following the expiry of the agreement, S&P CNX Nifty Index has been renamed as CNX Nifty Index. The ‘S&P’ trademark has also been dropped from the names of other indices of the National Stock Exchange

International financial market indexing and ratings major Standard and Poor’s (S&P’s) has ended its licensing agreement for benchmark indices of the National Stock Exchange, following which the Indian bourse cannot use S&P name for any of its products.


S&P had a licensing arrangement with India Index Services & Products (IISL), a joint venture between NSE and Indian ratings agency and S&P group firm Crisil, under which the Indian bourse was using S&P trademark in the names of its various indices including market benchmark Nifty.


However, the licensing agreement has expired with effect from 31 January 2013, IISL said in a statement today.


Following the expiry of the agreement, S&P CNX Nifty Index has been renamed as CNX Nifty Index, while ‘S&P’ trademark has also been dropped from the names of other indices—namely Defty, Nifty Dividend, CNX 500, Nifty Shariah, CNX 500 Shariah and CNX Industry Indices.


Vishwaroopam: An exercise in self indulgence and childishness

For a movie that is the brainchild of the so called ‘intellectual’ of Tamil cinema, the movie is painfully childish and stupid even, in bits. And there’s the threat of a sequel coming soon, to boot, much more real than any terrorist threat

While I certainly don’t know enough to comment on whether the content in this movie is offensive to certain religious/cultural groups, I will certainly say this though. A preview screening to people moderately knowledgeable in physics or chemistry would have drawn much more ire than any other particular section of people. At a bloated two-and-half hours running time, Kamal Haasan’s Vishwaroopam misses the mark by a fair bit. Engineered as a one-man show, the movie has its share of guilty pleasures but as the movie progresses, the plot competes with the audience’s patience as to which wears down thinner the fastest.

The premise is somewhat similar to James Cameron’s True Lies initially: Husband leading a double life, a frustrated wife, etc. The plot then moves into the conventional terror/ anti-terror territory with Kamal as a RAW agent infiltrating the Al Qaeda (LOL) and later racing to save the Big Apple. These two lines possibly sum up 147 out of 148 minutes of the running time with one minute’s grace for credits. Only colanders are more perforated than this movie’s plot.

Emotional Kamal Haasan says Tamil Nadu does not want him

If there is anything to write home (positively) about, it is the first fight scene, done with panache. That also seems to borrow from the Sherlock Holmes series’ slow-mo and normal speed fights. Although it is done the other way around for a minimal originality claim. Kamal’s portrayal of the slightly effeminate dancer is also decent. That apart, the movie has its share of unintentional laughs, veteran actor Nasser being the primary source of the funniest ones. He knows only Arabic, but he has a Tamil accent. He also runs around hip-firing from an 11mm machine gun. To a person acquainted with FPS games like Call of Duty and Battlefield which realistically simulate battle conditions, these battle scenes would seem appalling.  If you’re spending Rs95 crore, you might as well make good use of it. But no, the NATO attack scenes would make Treyarch and Infinity Ward (creators of the Modern Warfare and Black Ops series), let alone real soldiers, cringe in horror. If it’s done right in a bloody video game, do it right in a mega movie, for Pete’s sake. As a vehicle to portray Kamal Haasan’s stardom, this movie does a good job because he has, possibly intentionally, managed to make noteworthy stars like Shekhar Kapur and Rahul Bose ham so badly that his own over-acting seems quasi-credible.

As is with a lot of Kamal Haasan’s movies, there is his usual commentary on the existence of God or lack thereof, though his character is that of a Muslim devout enough to roll out the prayer mat and offer his prayers in the vicinity of a dirty bomb, knowing fully well that he is delaying an FBI op. For a movie that is the brainchild of the so called ‘intellectual’ of Tamil cinema (world cinema, one could argue, given his moniker), the movie is painfully childish and stupid even, in bits. It doesn’t work on any level. And there’s the threat of a sequel coming soon, to boot, much more real than any terrorist threat.




4 years ago

Spies and mercenaries do all sorts of dirty jobs such as killing, miming, robbing and kidnapping and in Visvaroopam the job of spying for Americans is done by an Indian Muslim ( Kamal is the guy)who pretends to work for the enemies of Americans but in fact works for the Americans and doing so he saves a lot of people from the brutal killings by bombing

Kamal who acts as the spy does a good job of acting and gives the right information to the Americans and saves lives.

Americans are not brave soldiers on the land but good at bombing from unmanned planes and killing both civilians and militants

So far by Drone attacks they have killed 1463 people out of this only 3% are militants and 97% are innocent civilians, If the US does kill civilians it is called collateral damages and if Al-Qaeda does it, it is called Islamic terrorism. So the Americans divide the humanity into two types 1. Worthy humans ( white) 2. Unworthy humans (Afghans)


4 years ago

MR reviewer, how eligible you are to review a movie. Guys he is not at all capable of being reviewer. A critic should have any one of the point of views to review a film i.e. from audience point of view of the technician point of view. Seems the reviewer lack of both or he reviewed in this way intently.
I agree there are few flaws in this film. Not just this I show flaws from Citizen Kane and Akira Kurosawa’s Rashomon to latest steven spielberg’s Lincoln. There is no movie without flaws at all because it a movie made by human not a life mad by god.
However reviewing the movie is not your cup of tea. Instead of giving bad review and letting an artist down in the country go join the political party it’s worth for you to consumers as well.

Krishnaswami CVR

4 years ago

The review cites only the fight scenes as silly and there is no other reason cited to brand the movie as " childish."



In Reply to Krishnaswami CVR 4 years ago

Fight Scenes are not silly, as Americans Helicoptes are depicted trying to trace the exact Location of their Prisoners and get them back . In the Process some fights happened , that too at the exact location .Many are known through Media how Americans fight and Talibans Firing on the Sky also is seen in Media. Kamal might have studied minutely many details and Pictured.


4 years ago

Article blames kamalhasan for no valid reason.As Indians do not see Hollywood movies normally,he made a bold movie,in hollywood style and consequently indians are thrilled seeing movie, gripping every minute to see unknown things. Hatsoff and Congrats to Kamal.

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