Editorial 1 : The Rich Exploit Loophole in System
Context: Taxing the rich more will reduce inequality.
Introduction: Public spending in India is way below the minimum required to deliver essential social and economic rights of the people.
Inadequacy of Public Spending
- 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.
- 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.
Economic Inequality
- According to researchers at the World Inequality Lab, India is 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.
- Outcomes
- Such extreme inequality has not helped to increase investment rates, productivity or economic dynamism.
- It has generated stagnation of mass consumption demand, which has acted as a deterrent for private investment.
- It has also led to greater social divisions and, increasingly, greater political tensions.
- Persistent poverty, possibly understated due to manipulated government data.
Role of Fiscal Policy in Addressing Inequality
- 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.
Taxation Issues
- 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.
- Regressive Taxation: 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.
Taxing the Super-Rich
- Global Demand for Wealth Taxation
- Growing international consensus on taxing ultra-high-net-worth individuals (UHNWIs).
- G20 Summit declaration supports effective taxation of the super-rich.
- 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.
Proposals by French economist, Gabriel Zucman
- French economist Gabriel Zucman, proposed a model of international coordination to ensure the effective taxation of ultra-high-net-worth individuals (UHNWIs).
- Minimum annual tax of 2% on wealth exceeding $1 billion.
- Tax can be a combination of income and wealth taxes.
- Lowering the threshold to cover centimillionaires (wealth above $100 million).
- What does it require?
- Cross-country cooperation and exchange of financial information.
- Obligations to reveal beneficial ownership of assets.
- Tracking wealth through digitisation and international agreements.
Benefits of Taxing the Wealthy Fairly
- Increased government revenue to fund essential public spending.
- Contribution to reducing economic inequality.
- Ethical imperative to tax the rich just as others are taxed.
Conclusion
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 the government should not be giving excuses to avoid doing it.
Editorial 2 : Pikketty’s Wrong. We aren’t that unequal
Context: India’s tax-to-GDP ratio is definitely not too low. Indeed, it might be too high.
Background: On a recent visit to India, French economist Thomas 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.
Piketty’s Claims
- Firstly, Piketty claimed that income inequality in India is second highest in the world (just lower than South Africa’s Gini of 0.63).
- Counterpoint:
- India lacks an official income distribution survey, making this claim speculative.
- 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.
- Secondly, 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. This will make India grow faster.
- Counterpoint:
- India has achieved over 6% annual growth for the past 30 years without extreme inequality levels.
- Third, the ratio of tax collections to GDP in India is only 13%, 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% wealth tax would raise tax revenue by 0.5% of GDP in India.
- Counterpoint:
- Recent data from the RBI Governor and Finance Ministry officials shows India’s tax-to-GDP ratio was 16.7% in 2019-20, higher than Piketty’s estimate.
- Today, the ratio is estimated to be around 18-19%, surpassing countries like China (16%) and Vietnam (13.3% in 2019).
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.