Tax the wealthy to propel inclusive economic growth

Wealth acts as a buffer during times of economic distress.

Even a modest observer can’t miss the apparent contrast that my city, Kolkata, throws up. What one also can’t miss now are the construction smog, renovation work, and new buildings cropping up at every turn. Being a relatively affordable real estate market, post-pandemic optimism in Kolkata is soaring. Apartments up to 500 sq ft saw a 56 per cent rise in sales; those between 501 and 1,000 sq ft grew by 79 per cent; and those upwards of 1001 sq ft increased by 87 per cent since January 2022. This is both a positive indicator of the growth of wealth and a worrying sign of K-shaped progress, raising concerns about whether a shrinking middle-class consumer base is necessarily turning into an upper-class consumer group.

The answer lies in the distinct sight of abject poverty and dire homelessness: Ragged clothes, a few PET bottle possessions, wistfully surviving in a tiny part of the footpath or space below a flyover, almost always left to fend for themselves. There has also been a surge in the number of families, mostly migrants from nearby states, living under tarpaulins in Kolkata’s 40°C summers, water-logged monsoons, and biting winters.

Recent studies have consistently disproved the long-hailed neoliberal concept of a trickle-down effect, which said that economic growth would raise the living standards of all in society, with marginal disparities. As it turns out, economies have certainly grown over the years, but not in an inclusive manner.

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As per the World Poverty Clock, 3 per cent of the Indian diaspora lives in extreme poverty, below Rs 155.51 per day. This is a staggering 4,42,13,761 people, of whom 4.17 crore reside in rural India and more than 24 lakh in urban India. Based on the Periodic Labour Force Survey data, the poverty headcount ratio, i.e., the percentage of the population living below the poverty line, was 32 per cent in 2019–20. Recent data from the NSO is awaited. To put the depth of depravity in perspective, according to the State of Inequality Report, an Indian earning Rs 3 lakh per annum would be placed in the top 10 per cent of wage earners. In contrast, the richest 1 per cent own more than 40 per cent of the national wealth, and the wealthiest 10 per cent of Indians own more than 77 per cent.

According to the India Inequality Report 2021 by Oxfam India, the wealth of India’s billionaires increased by around 35 per cent during the Covid-19 pandemic, while the income of the bottom half of the population declined by around 20 per cent. Such extreme wealth accumulation is not just a stand-alone issue, but a causal factor in some other, equally detrimental issues.

Consumerism-driven climate crisis: In terms of usage, the top 1 per cent has a disproportionate carbon footprint. The bottom half of the population is responsible for carbon emissions of around 1 metric tonne per annum, while the richest 1 per cent of Indians emit 32.4 metric tonnes per annum on average. But it is the poor who suffer the consequences of the emissions of the rich.

Weakening democracy: With such immense wealth accumulation in the hands of a few, power too gets very concentrated, resulting in the formation of oligarchies. Quite naturally, these wealthy individuals would do their best to keep the wealth in their families, by influencing national and international politics. This often leads to an authoritarian style of rule after an opportune marriage between oligarchs and autocrats. Such leadership is evidently against the interests of the masses, resulting in an erosion of democratic values.

Volatile financial markets: Those with much wealth occupy large portions of the shares in the financial markets. A slight personal shift in their investments may have cascading consequences. Such vulnerable and volatile financial markets are not just risky for the smaller participants but also for non-participants. A bank run has severe inflationary tendencies, which, added to the real inflation rates, pinch the pockets of the poorer sections of society.

Wealth, then, acts as a buffer during times of economic distress. Income earners, who lack the cushioning of wealth, may need to draw loans, offer collateral, or fall victim to bad deals and high-interest rate traps during emergencies, whereas wealth holders have spare assets to monetise and fund their emergencies.

There is thus an urgent need for policy interventions to address rising inequality and ensure more inclusive economic growth. A progressive wealth tax would prove to be a viable alternative, permitting sensible social welfare spending.

Thomas Piketty demonstrated that between the 1940s and 1980s, the US and Europe experienced the maximum growth rates when taxes were at their peak. With heightened globalisation post-80s, tax cuts instead had been accompanied by relatively reduced growth rates than the previous years and had only fostered concentration of wealth.

During the migrant labour crisis and lockdowns of 2020, S Subramanian, a member of the advisory board of the World Bank’s Commission on Global Poverty, estimated that a 4 per cent Covid wealth tax on the wealthiest 953 families in India could have generated revenue worth 1 per cent of the estimated GDP of that year. This, incidentally, is lower than the package the GoI announced for public healthcare expenses amid the 2020 Covid-19 crisis.

The government’s revenue sources continue to shrink, especially with the recent wave of disinvestment in profitable PSUs. To keep the fiscal balance sheet in check, the government would need to increase its revenues, which in effect means increasing tax dependency. With unemployment consistently hovering around 7.8 per cent on a pan-India scale, according to CMIE data, any attempts to increase the direct tax ambit reach a dead end, leaving indirect taxes to fill the gap. A standard, regressive tax hurts those at the bottom of the spectrum the most!

If the idea of a wealth tax is akin to the notion of “penalising the wealthy for having financial resources,” doesn’t the idea of not imposing a wealth tax resonate with the notion of penalising the poorest for being poor?

(The writer is a student of economics at the University of Calcutta)

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