Thomas Piketty has argued that ultra rich in India must be taxed more to address rising inequality and raise more resources for government. Is his diagnosis accurate? (Illustration by C R Sasikumar)
Dec 27, 2024 13:53 IST First published on: Dec 27, 2024 at 07:22 IST
The advocacy of Robin Hood economics (take from the rich and give to the poor) has now survived for close to a 1,000 years (allegedly, the first known literary reference is circa 1377). The reason for the survival of this instinct is that it is very appealing, and has an aura that suggests that to question it is to be a cold-blooded fascist or any set of epithets you can think of. My strong belief is that all of us, have at one time or another, accepted the premise that you must take from the rich and give to the poor.
Indeed, that is the basis for all government policy and all-around the world. Thomas Piketty and his band of warriors have been engaged in the pursuit of redistribution for the last N years. It is a worthy cause. However, with all good intentions, and worthy causes, facts should not be sacrificed at the altar of ideology, or policy “preferences”. On a recent visit to India, Piketty made a few startling claims about tax collections and income distribution in India, “facts” which he claims makes it imperative that India tax the rich more in order to grow at a faster rate.
First, Piketty claimed that income inequality in India is second highest in the world (just lower than South Africa’s Gini of 0.63). India has never had an official income distribution survey so perhaps by making this seemingly outrageous assertion about an unknown income distribution, Piketty will help achieve a worthwhile end — an official income distribution survey for India might finally be conducted. Not that such a survey will answer all the unknowns, but it will be a meaningful start to the discovery of the unknown. One pointer that this assertion by Piketty is very likely outrageously incorrect is that the average gap between consumption and income Gini found by World Bank and other experts is around 6 Gini points — and the consumption Gini in India is around 0.34. An Indian income Gini around 0.4 may be plausible, but 0.6 is stretching it.
Having “established” that the income distribution is very unequal in India, Piketty suggests a win-win strategy — tax the rich at a higher rate, collect more taxes, and spend them on goods and services for the poor. And since all good things happen together, India will also be able to grow faster.
Along the way, Piketty also makes a highly inaccurate claim that “the government’s argument — that we need this kind of income scale and inequality to incentivise wealthy entrepreneurs to develop, accumulate wealth and deliver growth — is just not convincing.” This needs to be checked but I believe no one, not even Karl Marx, let alone a member of India’s government, has ever stated that you need a high level of inequality to generate faster growth. Note that
India has grown above 6 per cent annually for over 30 years without a Piketty level of inequality.
Other Piketty “facts”: The ratio of tax collections to GDP in India is only 13 per cent, so there is very little left for redistribution. Other countries, for example China, do much better in terms of taxation (and therefore redistribution). A 2 per cent wealth tax would raise tax revenue by 0.5 per cent of GDP in India.
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But the data-world changed several years ago. A multi-year and a multi-organisation effort led by the IMF finally bore fruit. In 2021, the IMF published all available tax collection data for 190 countries for the period 1990-2019, and now updated till 2021. (Tax data for centre, state and local: Latest data available at https://prosperitydata360.worldbank.org/en/dataset/IMF+WoRLD). Prior to this data release, aggregate data on tax-collections varied by size and nature of the economy. Most researchers in India (and several, unfortunately, continue to be oblivious to the new data) used the tax collection at only the centre (which Piketty also does through his World Inequality Lab) to obtain the inaccurate and highly misleading result that tax-collection to GDP ratio in India was as low as 13 per cent of GDP.
The newly appointed RBI Governor, Sanjay Malhotra along with his two Ministry of Finance colleagues Nilanjana Roy and K Balasubramanian, published an article ‘Tax-to-GDP Ratio, India’s Performance in Comparative Perspective’ (Economic and Political Weekly, June 24, 2023, page 13-15). Their findings based on a cross-country analysis of 166 countries was that “against a predicted values of 16.04 per cent (when social security is included) and 14.6 per cent (when social security is excluded), India’s actual tax-to-GDP ratio of 16.7 per cent is higher in both the cases.” The 16.7 per cent tax-GDP ratio is for 2019-20. Today it is likely close to 18-19 per cent; for China and Vietnam in 2019, it was 16 and 13.3 per cent respectively.
Safe conclusion: India’s tax to GDP ratio is definitely not too low a la Piketty, and indeed might be too high. Once we establish the facts, we can proceed towards hypotheses generation on wealth tax, tax collection, savings, and GDP growth.
Bhalla is former executive director, IMF. Views personal
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