India's rising inequality: Government should work toward a workable wealth tax

One of the Sustainable Development Goals of the United Nations calls for a reduction in inequality. On that count, India must exert more by making the income tax net wider and ensuring a lower indirect tax burden

Ajit Ranade May 01, 2024
Representational Photo

India’s problem is that it is under-taxed. This has been said several times, including in the Economic Survey published by the government, and by a former finance minister on the floor of the parliament. What is referred to here is the low tax-to-GDP ratio and not the tax rates. The rates are quite high, with top individual marginal income tax rates touching 42 percent, and median Goods and Services Tax at 18 percent. 

GST is an indirect tax paid by all, whether rich or poor, on their consumption. Since it does not depend on the income of the taxpayer, it is inherently regressive. Not surprisingly a much higher proportion of total GST collected comes from the lower half of the income distribution, highlighting its unfairness. We need both income and consumption taxes, but the rate of GST has to be much lower. And dependence on income tax has to increase, and it should be progressive and rates increasing by income slab.

Unfortunately, we give such a large exemption, that up to 7 lakhs (700,000 rupees) of annual income, the tax burden is zero. This is almost four times the per capita income of the country. It is equivalent to saying that in America nobody will pay income tax below an annual income of a quarter million dollars. Americans start paying income tax for income as low as 5000 dollars, only one-tenth of their per capita income.  India certainly needs to widen its income tax net. We have only 7 income taxpayers for every 100 voters as per the Economic Survey.

Rising inequality

Along with a low tax-to-GDP ratio, we have rising inequality. The latest report from the World Inequality Lab based on hundred years of data from 1922 till 2023 shows income and wealth inequality to be the highest ever. Fighting inequality is not the same as fighting poverty. The poverty ratio has been falling in India, but there are people still living dangerously close to the poverty line or just above it. One illness in the family can drive the entire family below the poverty line. Hence, we have food security schemes such as free food grain for 800 million Indians, i.e. nearly 65 percent, even though the poverty rate is below 15 percent. 

One of the Sustainable Development Goals of the United Nations calls for a reduction in inequality. On that count, India must exert more by making the income tax net wider and ensuring a lower indirect tax burden of GST and other sundry taxes. Most importantly inequality of opportunity (not outcomes) can be reduced by providing much higher quality and quantity levels of primary education and healthcare. 

But spending on social priorities has been going down as a fraction of government budgets.  This means we need more tax collection. What other heads are there? This is where the discussion of wealth tax comes in. Thomas Piketty claims that just by taxing the wealth of the richest two hundred people in the world, at a small rate, the world can generate hundreds of billion dollars for social spending. That same logic can be applied in India.

Wealth is difficult to assess, especially if kept in real estate. It is also notoriously difficult to discover since people have an incentive to hide it. There is tax evasion and dodging. The correlation between wealthy individuals and the highest-income taxpayers in India is not strong. How many of the Forbes billionaires are also the highest-income taxpayers?

So, is there a workable and reasonable way to tax wealth?  Countries like Spain, Norway, Switzerland and France have some form of wealth tax. Even the Netherlands has a tax called “Box-3” which is a tax on wealth, i.e. by taxation of savings and investment. Of course, all these are rich countries. And their financial systems are highly evolved, with evasion rather difficult.  

Wealth concentration

India is a poor or medium-income country, so it is premature to talk about wealth tax. It has among the highest number of dollar billionaires in the world. A small annual tax of say 0.1 percent per annum would surely not deter these wealthy from wealth or employment creation or investing in India. If there is capital flight out of the country it is not because of wealth taxes. 

Unlimited wealth concentration cannot be healthy for any democracy. The principle of political and social equality of our republic is in sharp contradiction to rising economic inequality. That is why we need to find ways to arrest worsening income and wealth inequality. No modern capitalist economy can be rid of inequality. But it is like industrial pollution. Modern life is impossible without some emissions. But there comes a time when as a society we say this is enough. Otherwise, worsening inequality leads to social instability, the rise of gated communities, the threat of rising crime and ultimately investor flight. What is that stage when inequality becomes intolerable and excessive is for us to decide collectively.

India’s macro savings are only half in instruments like stocks, bonds, insurance and bank deposits. The rest is in real estate or gold. Real estate valuations are revealed only when there is a transaction on which stamp duty is imposed. Such transactions are rare and hence stamp duty collection is low at the state level from real estate. 

Thanks to digitization and better triangulation, we have good data on financial savings. Hence it is possible to levy a wealth tax on just that part, above a threshold of say 100 crore rupees. It could be as small as 0.1 percent. The purpose is not merely to raise fiscal resources. Many prominent rich people such as Narayan Murthy, Bill Gates, Warren Buffett, Nikhil Kamath, Sir Richard Branson have all said that they welcome higher taxes. In the Financial Times, Ian Gregg, chairman of the British bakery chain Greggs, wrote an op-ed saying that the wealthy should be taxed more, and that trickle-down economics was not working.  Are these wealthy people saying tax us more just to sound politically right, or out of genuine compassion? Maybe a bit of both, and also to save society from a worsening scenario, where fury is unleashed on the obscenely wealthy.

In the UK it was estimated during Covid that a one-off small tax on the wealthy would generate a quarter trillion pounds for the government. Such is the scale of this potential fiscal gain.  A workable wealth tax can use best practices from some of the dozen countries that implement it and start with a small rate applicable to disclosed financial assets alone.  Taxing real estate can be kept as a domain of stamp duty for now, and taxing the ownership of gold is something for the future.

(The writer is a noted economist and commentator. Views are personal. By special arrangement with The Billion Press)

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