It’s time to tax the wealthy and bridge inequalities

By all accounts, India is considered one of the most unequal countries in the world, and inequality has been on the rise in recent years. The World Inequality Report 2022 reported that the top 1 per cent in India owns 22 per cent of the total national income, while 10 per cent holds 57 per cent, and the bottom 50 per cent owns only 13 per cent. The wealth inequalities are even higher, with the top 1 per cent owning 33 per cent, the top 10 per cent holding 65 per cent, and the bottom 50 per cent holding as little as 6 per cent of the total household wealth. Despite the visible slowdown of the Indian economy since 2015-16, the recent economic growth rates have been higher than those in many developing nations. However, it is evident that this growth has not significantly benefited the bottom half of the population.

What makes it worse is that the recent economic growth experienced in India has largely been jobless growth. The International Labour Organisation (ILO) estimates show that the youth (15-24 years) unemployment rate, which had been hovering around 22 per cent in the last decade, went up to 24.9 per cent in 2020 and 28.7 per cent in 2021, marking a steep rise. This has implications for rising inequality and the so-called demographic dividends, which cannot be realized without creating opportunities for our youth to earn, and earn well.

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It is now widely believed and agreed, especially in the post-Covid world, that fiscal policies can play an active role in promoting more equitable and sustainable growth, directly addressing issues of poverty, low income, and employment. Higher public investment in long-term human development markers such as education, nutrition, and healthcare, along with a focus on developing small manufacturing, non-farm economic opportunities, and other ways of creating both employment and income (and hence, demand) at the decentralized level and large scale, is being recommended not only by rights-based organisations such as UNICEF (for instance, see https://www.unicef.org/rosa/reports/responding-today-tomorrow) but also by institutions like the World Bank (e.g., https://openknowledge.worldbank.org/server/api/core/bitstreams/b96b361a-a806-5567-8e8a-b14392e11fa0/content). To enable such a supportive fiscal policy, India needs to widen its revenue collection and revenue base. Therefore, it becomes important to discuss the need for levying wealth tax and implementing it now.

Arguments in favour of wealth tax as a major source of revenue in highly unequal economies are simple and compelling. Massive accumulation of wealth in very few hands implies that a smaller section of people has access to a much larger share of economic assets and resources that remain almost completely unavailable for public spending. Wealth tax can help tap into a part of these resources and convert them into productive public expenditure, which could play a role in galvanising the economy if spent wisely, and hopefully also in stopping the widening of inequalities. It is a progressive measure, especially in present-day India, where it is unlikely to have any impact on the lower middle or low-income groups. It is also fair since a high level of wealth is usually a result of inheritance and accumulated social capital associated with belonging to privileged classes, castes, and families, rather than being linked to an individual’s merit.

Wealth tax is opposed on the grounds of its possible adverse impact on private investments and innovation. The best way to examine these concerns would be to look at recent trends in private investment to gauge what happens when there is no wealth tax. Private investment as a percentage of GDP has been either stagnant or declining since 2013, despite consistent growth in credit to the private sector during the same period. The World Bank estimates show that private investment fell from 31 per cent of GDP in 2011 to 22 per cent in 2020, and even below 20 per cent in the following years. Even fiscal stimulus measures, such as lowering corporate tax rates from 30 per cent to 22 per cent in 2019-20, did not change this trend. Clearly, there is something else at work, and it is evident that accumulated wealth does not automatically convert into investment or innovation when there is low demand. This makes wealth tax a legitimate fiscal policy choice. Many argue that these factors are unrelated in a modern and complex economic system since making the rich poorer does not necessarily make the poor rich or even less poor. That is true, but it can be addressed by promoting progressive and well-directed public spending on desired lines, which can also stimulate demand and, in turn, perhaps even private investment.

Wealth tax can take several forms. One of the easiest ways to levy a wealth tax would be to change the nature of the gift tax in India, which currently exists as part of the income tax since 2017. While any cash, movable, and immovable property worth above Rs 50,000 is taxable, all gifts received during marriage, death, or inheritance through a will are exempted, and all gifts from relatives (self or spouse’s) at any time are also exempted. If these exemptions (related to both relatives and occasions) are removed and the threshold is increased to even Rs 5 crore, this can be a far more effective measure in tapping wealth transfers that occur within extended families or even otherwise, especially during extravagant Indian weddings, as a source of revenue.

In addition, property tax and capital gains tax are other examples of wealth tax. Capital gains tax exists in India, but it currently refers only to transactions, and there are also exemptions for reinvestment. However, limiting the deduction of tax benefits for reinvestment to Rs 10 crore for capital gains in the 2023 Union budget is a welcome step. Nevertheless, the rationale for a non-transactional net wealth tax, levied on the entire wealth of an individual but applicable only to super-rich or high net worth individuals, also exists due to high inequality. Even if it is not imposed regularly, it can at least be implemented as a one-time ‘solidarity tax’ to deal with the adverse impact of the pandemic on the economy, as being done by a number of Latin American countries. The millionaires who added millions more even during Covid-19 owe at least that much to the country.

(The writer heads the Bengaluru-based think tank, Centre for Budget and Policy Studies.)

(This is the sixth of a series of articles on inequality in India, curated in collaboration with the Centre for Financial Accountability, New Delhi)