India’s tax structure is unfairly loaded against the poor and middle classes, while the rich have been beneficiaries of growth
Dec 27, 2024 07:23 IST First published on: Dec 27, 2024 at 07:23 IST
It is beyond obvious that public spending in India is way below the minimum required to deliver essential social and economic rights of the people. Despite several decades of relatively fast aggregate income growth, large sections of the population are still deprived of basic needs like access to minimum nutritious food, good quality health services, education, proper housing, as well as amenities like fuel and electricity. In addition, the public investments that are so necessary to enable vulnerable people to adapt to ongoing climate change and related natural disasters, or to deliver the green transition, are also hugely below the minimum requirement.
Meanwhile, according to researchers at the World Inequality Lab, India has already become one of the most unequal countries in the world, in terms of both asset and income inequalities. Most of the GDP gains over the past decades have gone to the top 10 per cent of the population, and within that to the very wealthy. Such extreme inequality has not helped to increase investment rates, productivity or economic dynamism. Instead, it has generated stagnation of mass consumption demand, which has acted as a deterrent for private investment. Unsurprisingly, it has also led to greater social divisions and, increasingly, greater political tensions. It is also likely that poverty remains significant, despite the efforts of the government to prevent knowledge about this by creating new indices and massaging available data to suit its own narrative.
Changing this unhappy situation requires a major shift in the central government’s approach to economic strategy, and a more progressive fiscal policy is a key element of this. Much increased public spending is absolutely essential, and to be sustainable this will mean that the government must mobilise more of its own resources. Tax-to-GDP ratios in India are relatively low, even when compared to other middle-income countries, and among the lowest in the G20 countries. And the tax system is regressive, relying on taxes that fall disproportionately on the poor (indirect taxes) and middle classes than on the rich who have been the main beneficiaries of recent growth.
To address both the need for much increased public spending and the explosion of the wealth and associated power of the super-rich, a first critical step is to tax them fairly. In fact, all over the world, public demands for taxing the super-rich are becoming louder and even recognised by policy makers. The final statement of the G20 Summit in Rio in November (also endorsed by the Government of India) declared that “With full respect to tax sovereignty, we will seek to engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed.”
This is based on the recognition that the richest people in the world are able to avoid paying their fair share of personal income taxes, because of their ability to exploit loopholes in tax systems and shift assets to tax havens. Indeed, in most countries (including India) their effective tax rates are lower than those of most salaried people.
The Brazil Presidency of the G20 commissioned a report from the French economist Gabriel Zucman, which proposed a model of international coordination to ensure the effective taxation of ultra-high-net-worth individuals (UHNWIs). Essentially, people with more than $1 billion in wealth would pay a minimum annual tax equivalent to 2 per cent of that wealth. This need not be only in the form of a wealth tax: It could be a combination of taxes on income (broadly defined) and wealth. A global minimum tax of 2 per cent would mean that rich people who avoid paying in their country of tax residence by shifting their assets, could be charged up to that amount on their wealth wherever they choose to hold it. It is possible to lower the threshold to cover centimillionaires (those holding at least $100 million in assets).
This obviously requires cross-country co-operation. It requires the exchange of international financial information, including the obligation to reveal the beneficial owners of all assets and intermediate vehicles (such as real estate funds, holding companies, trust funds, etc.) and the extension of tax residence coverage. This is now technically feasible, because of recent international agreements on the automatic exchange of banking information, money laundering and corporate taxation.
It is often argued that in countries like India, a wealth tax is not administratively feasible, and would cost more to administer than it would deliver in revenues. That is no longer true, because of increased digitisation of financial records that makes it much easier to track financial wealth, while real estate ownership is already tracked by state governments.
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Another common argument is that this would deter the very rich from investing in India, and lead them to shift their wealth abroad and even to move away. But several countries (including developing countries like Colombia) tax the wealth of tax residents wherever it is held, and many countries like the US and France impose exit taxes on those who want to leave for such reasons.
Simply taxing the very rich fairly, just as others in the country are taxed, would generate much more revenues for the government and at least contribute somewhat to reducing the obscene economic inequalities in India. This is both feasible and necessary, and there is really no excuse now for the Narendra Modi government to avoid doing it.
The writer is professor of economics at the University of Massachusetts, Amherst
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