Towards a workable ‘wealth tax’

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 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%, and the median Goods and Services Tax at 18%. 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 on GST has to be much lower. And dependence on income tax has to increase, and it should be progressive, and rates should increase with the income slab. 

Unfortunately, we give such a large exemption, that up to Rs 7 lakh 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 of a million dollars. In fact, Americans start paying income tax for income as low as $5,000, only one tenth of its per capita income. India certainly needs to widen the income tax net. We have only seven income taxpayers for every 100 voters, as per the Economic Survey.

Along with a low tax-to-GDP ratio we have rising inequality. The latest report from the World Inequality Lab, based on a hundred years of data from 1922 till 2023, show income and wealth inequality to be the highest ever now. 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 80 crore Indians, i.e., nearly 65% of the population,
even though poverty rate is below 15% of the population.  

One of the UN Sustainable Development Goals calls for 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 of primary education and healthcare. But spending on these 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 on ‘wealth tax’ comes in. Thomas Piketty claims that just by taxing the wealth of the richest 200 people in the world, at a small rate, the world can generate hundreds of billions of 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 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 Netherlands has a tax called ‘Box-3’ which is a tax on wealth, i.e., tax on savings and investment. Of course, all these are rich countries. And their financial systems are highly evolved, with evasion rather difficult. You can’t say that 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% 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. As it is, we are trying constantly to reduce the influence of money power on elections and governance. 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, rise of gated communities, the threat of rising crime and ultimately investor flight. 

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 a stamp duty is imposed. Such transactions are rare and hence stamp duty collection is low at the state level from real estate. Thanks to digitisation 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, Rs 100 crore. It could be as small as 0.1%. Many prominent rich people such as N R Narayana Murthy, Bill Gates, Warrant Buffet, Nikhil Kamath, Richard Branson have all said that they welcome higher taxes on the wealthy. Are they 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 250 billion 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 which implement it and start with a small rate applicable on 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 Pune-based economist)

(Syndicate: The Billion Press)