Imposing the Wealth Tax in order to reduce income inequality

The debate over efficient, effective, and equitable government spending frequently takes us into the realm of limited resources and competing demands. India must definitely broaden its revenue collection and base. In this context, it is time to consider a wealth tax that could harm the Indian economy.

Wealth tax

  • Wealth tax, unlike goods and services tax or value-added tax, is a direct tax that can take several forms, including property tax, inheritance or gift tax, and capital gains tax.
  • It seeks to reduce wealth disparities.
  • It is based on the market value of a taxpayer’s assets and is levied on the net wealth of super-rich individuals.

Wealth Tax in India

  • Wealth tax was repealed: As announced in the 2015 budget, the government repealed the wealth tax. Instead, the government decided to raise the surcharge on the “super rich” class by 2% to 12%. (Super-rich individuals and businesses have incomes of Rs.1 crore or more.
  • Abolished to simplify tax structure and discourage tax evasion: The abolition was intended to eliminate high collection costs while also simplifying the existing tax structure and discouraging tax evasion.
  • There is currently no wealth tax in India, which is a tax levied on one’s entire property in all forms. It did not levy a one-time solidarity tax’ on wealth in post-covid budgets, which could have raised funds for critical public investment.

What is the rationale for imposing a wealth tax?

  • High inequality: India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022.
  • Massive concentration of wealth in a few hands: A small group of people has access to a large portion of economic assets and resources that are almost entirely untaxed and thus unavailable for public allocation.
  • The capital gains tax has a narrow base: In India, capital gains tax exists, but it only applies to transactions and thus has a limited base.
  • Wealth, much less than income, is largely dependent on inheritance and privilege: Wealth, much less than income, is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes.
  • India has no inheritance tax: India abolished estate duty in 1985 and now has no inheritance tax.
  • Gift tax exemptions are almost entirely available: Although the receipt of gifts is subject to income tax in the hands of the beneficiary, there are several exemptions; it is almost entirely exempt if received from within the family, including self and spouse’s extended family. These exemptions significantly reduce the base, as most accumulated wealth is acquired through family, which is exempt from the gift tax. Some exemptions make sense given the cultural context of wealth inheritance, but upper thresholds can easily be added to make it more effective.

Comprehensive Point of View: Why is a wealth tax necessary in the current economic climate?

  • The wealth of the wealthy doubled during the pandemic, but it was not well channeled to generate productive resources: According to an Oxfam report, the richest people in India doubled their wealth during the pandemic. This occurred for a number of reasons. Despite grave financial and economic challenges, has no means of converting any of this growing wealth into productive resources that can generate employment opportunities and raise the incomes of a large number of people, thereby driving demand for goods, which is required to counteract an economic drag-down.
  • Private investment has not increased sufficiently: In 2019-20, the government reduced the corporate tax rate from 30% to 22%, a trend that has continued despite the economic crises caused by the pandemic. This, however, did not elicit much private investment. Clearly, something else is at work, and one cannot assume that wealth accumulated in private hands will be invested in the domestic economy.
  • Not only is investment important, but so is the right application: It is not only important to invest, but also to know where that investment is going and whether it is creating job opportunities for young people.

Present status and economic projections

  • Data on youth unemployment: Data from various sources show that youth unemployment rates will be high during May-July 2022: 28.3% in the 15-24 age group and an even higher 43.3% in the 20-24 age group.
  • The likelihood of a global recession, as well as the associated layoffs announced by corporate titans, will exacerbate the situation.
  • Jobless growth and wealth inequality: India’s recent economic growth, particularly in the post-covid recovery phase, has largely been jobless growth, which has the potential to exacerbate both income and wealth inequalities.
  • The economy cannot afford such a high level of youth unemployment: No economy can sustain such high rates of youth unemployment for long without jeopardizing economic growth and social cohesion.

Way forward

  • A number of Latin American countries, including Argentina, Peru, and Bolivia, have either implemented or are planning to implement a progressive annual wealth tax levied on annual wealth gains or a one-time covid’solidarity’ tax.
  • There’s no reason why India can’t do the same. This is the right time to implement a progressive wealth tax, along with other fiscal measures that can directly reverse the country’s trend of growing inequalities.

@the end

As suggested by a number of economists, India needs to change its fiscal policy in order to implement measures that create job opportunities and, as a result, drive demand for products manufactured by small and medium-sized businesses. This would also boost growth while not necessarily increasing inequality.

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