Goldman Sachs, the world's most valuable investment bank, was earlier this week forced to backtrack on plans to defer payment of bonuses till April 6, a step it had contemplated to take advantage of a decline in the UK's top tax rate from 50% to 45% after that date. The circumstances were humiliating and included a rebuke from Bank of England Governor Sir Mervyn King, who described Goldman's behaviour as "depressing" and suggested that it did not care how its actions would be perceived by society.

Goldman's public shaming is a prominent, and latest example, of a change in the Zeitgeist, or intellectual fashion, in much of the Western world in the wake of the financial crisis of 2008. The shifting of the intellectual tides has meant that higher taxes on the rich - along with rising levels of class-warfare rhetoric - has become fashionable in much of the OECD, a club of 34 industrialised countries.

Tax rates were recently raised in the US (the top marginal rate is 39.6%) to levels prevalent during the Clinton era as part of the talks over the fiscal cliff. France has imposed a tax of 75% on those earning over 1 million, leading to actor Gerard Depardieu seeking citizenship in Russia (top income-tax rate -17%).

These developments, experts and economists say, may result in India learning the wrong lessons and reversing a three-decade trend towards lower tax rates and deregulation. The so-called trend towards higher tax rates may, on closer examination, turn out to be a chimera.

India Influenced by Debate in West

Any attempt on the part of India to follow the trend may lead to a flight of white (i.e.- legitimate) capital, with companies and individuals choosing to invest and live abroad.

"Money will go to places where it can build wealth. Other countries will invite the rich. Not only will physical capital migrate, there will be a flight of intellectual capital to tax-friendly nations such as Singapore. Wealthy people will become non-resident Indians," says Richard Rekhy, CEO, KPMG.

"India is, to some extent, being influenced by the debate in the West, in the US and France," says Abheek Barua, chief economist, HDFC BankBSE 0.37 %. In pre-budget meetings with the finance minster, industry chambers CII and Ficci have strongly opposed higher taxes.

"None of the economists (attending a pre-budget meeting) were in support of (PM's Economic Advisory Council chairman) C Rangarajan's proposal. Just because the US has a problem doesn't mean it's the same everywhere," says economist Surjit Bhalla. He was referring to an idea floated by Rangarajan, an influential policymaker, in an interview with this newspaper, where he had talked of the possibility of a higher marginal tax rate on higher incomes.

INVESTING ABROAD

Since 2010, as the investment climate has deteriorated, many industrialists are choosing to invest abroad. Two groups with strong links to natural resources, Vedanta and Essar, are listed in London and the bulk of revenues of the Tata Group originates from abroad. Anecdotal evidence, and cocktail party chatter, suggest intense dissatisfaction with the state of affairs in India, leading many industrialists and top-notch professionals to contemplate investing and living abroad, a sort of flight of the blue-blooded.

Overseas FDI from India during April-November 2012 amounted to $5.29 billion compared to $7.46 billion in the year-ago period, according to RBI data. Total overseas FDI in FY12 amounted to $10.95 billion. Cumulative overseas FDI as of end-September 2012 amounted to $115.8 billion, while inflows amounted to $230 billion. Indian companies also seem to be reluctant to repatriate dividends, a possible indication of a lessthan-salubrious investment climate at home. No Indian company, except the Tata Group companies ( TCSBSE -0.27 %, Tata SteelBSE 0.10 %, Tata MotorsBSE 0.27 %, Tata ChemicalsBSE 0.22 % and TGB) and Infosys, have received dividends in significant amounts from overseas subsidiaries over the past few years.

In 2012, the overseas subsidiaries of the Tata Group had proposed a dividend of Rs 7,400 crore while the overseas subsidiaries of InfosysBSE -0.29 % also proposed a dividend of Rs 578 crore in 2012 compared with a year ago when there was no dividend payout. Other than these and a few others such as the overseas subsidiary of WiproBSE -4.91 %, hardly any Indian company has brought back dividends.