Till taxes divide us apart

The recent media report that the Government of India is planning to increase capital gains tax for the high earners, was rejected by the Income Tax department. But we forget that there have efforts to standardise the tax rates. The government’s direct tax task force report of 2019 suggested three categories of assets: equity, non-equity financial assets, and all others including property. It proposed indexation benefits for all categories except equities.

A Flawed Approach

India levies a tax of 30 percent on income (and added surcharges), it taxes gains on certain asset classes such as equity funds and stocks at a lower rate. But then, only about 3 percent of India's population currently invests in stock markets, and that includes all socio-economic segments. Proponents will always argue that taxing the rich more can help generate revenue to fund public services, reduce wealth concentration, and promote a more equitable society.

Why is this a flawed approach. Think of our taxation regime akin to a huge landfill. Over the decades, various amendments in tax procedures, taxation slabs, structures, rates, applicability, reliefs, exemptions, indices, etc. have only added layers to this tax-landfill, and created a maze that needs experts to even file and sort annual taxes for those paying. To be fair to the government, it has been attempting to simplify this, and any step in taxation reforms is a one that could attract more (political) criticisms than (social) gratitude.

Negative Results, Undesired Consequences

First, constant tax increases for the rich can have negative economic consequences. The wealthy are often job creators (direct or indirect), entrepreneurs, and investors who drive economic growth and innovation, and stimulate consumer spending. When they face higher tax rates, they may reduce investment, cut back on spending, or move their investments to other jurisdictions with lower tax rates. This can result in a reduction in business activities, a slowdown in economic growth, and ultimately, fewer job opportunities for ordinary citizens.

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Second, increasing taxes on the rich may not necessarily result in the desired redistribution of wealth. Wealthy individuals have access to various tax planning strategies and tax loopholes that allow them to minimise their tax liabilities, such as offshore investments, trusts, and other legal mechanisms. This can result in reduced revenue from the intended tax increases.

In an increasingly interconnected and competitive global economy, countries often compete for capital, skills, and innovation. If the proposed tax increase makes India less attractive for high-income earners or investors, it could have implications for the ability to attract and retain talent and investment, which are crucial for economic growth and development.

Find The Right Balance

One can argue that defining ‘tax fairness’ is subjective, and can vary depending on one's perspective. The wealthy already contribute a significant portion of the overall tax revenue. The wealthy often pay taxes (in various other forms, such as property taxes, sales taxes, and capital gains taxes), and, therefore, contribute to the nation building. One can even argue that this is despite the poor civic infrastructure in most of our cities, compared to quality of living in most developed nation who charge similar or lesser taxation.

Lastly, constantly increasing taxes for the rich may not address the underlying causes of social and economic inequalities. Taxation is just one tool in a broader policy toolkit, and by focusing solely on taxing the wealthy, we may miss addressing other root causes of inequality, such as lack of access to quality education, healthcare, affordable housing, and employment opportunities, in the long term and with sustainable means.

The relationship between wealth and democracy is complex and multifaceted. We must be sensitive that populist sentiments should not come in the way of wealth creation. Is wealth creation using intelligence and skills an outdated human need? In a world that’s increasingly driven by services and technology, is knowledge so underrated that wealth creators have to necessarily create direct employment? An India 30 years ago, which saw a landline phone at home as being only for the wealthy, today leads with its digital infrastructure. Not reverting to old philosophies is a must. Finding the right rhythm between tax policy, economic growth, and social equity is a complex challenge.

(Srinath Sridharan is an author, policy researcher, and corporate adviser. Twitter: @ssmumbai)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH