How the rich are taxed in America, where it was glorious to be rich long before China took hold, is a concern for capitalists everywhere about what other regimes might take. Tax-and-spend has made a big comeback in America under President Joe Biden, whose sprawling social-spending plan he promised to finance by taxing only the ultra-rich. His eyes are on billionaires who have a net worth of over $1 billion or who earn $100 million as income for three consecutive years. Under debate in Washington there is a proposal to impose a levy on the mark-to-market ‘capital gains’ they make on their investment portfolios, even if nothing is traded or liquidated. In the absence of actual transfers, this seems impractical. Furthermore, since the liability calculation requires market values, it would unfairly penalize those with their large fortunes in publicly listed stocks, even the stock exchanges for financial arbitrage over time. would also reduce its appeal, which would harm American capitalism. Biden’s second idea is the inheritance tax. The policy highlight of this is that property left by a billionaire to heirs actually involves a change in ownership. Also, what they achieve is not imaginary. To effect this, the US may eliminate a rule that sets the accrual of capital gains on assets to zero, thus forcing heirs to give up some of their windfall gains. The law that the US Congress will eventually enact is difficult to predict, but it could serve as a signal to other countries.
That the super-rich should part with some of their wealth to help uplift the needy is an idea widely accepted today. Indeed, many American billionaires have said they support it. Globally, wealth inequality is widening and accelerating, with the pandemic leading a capitalist trend headlined by economist Thomas Piketty, who called for wealth taxes on the argument that inequality would widen only if the average return on capital will exceed the global economy. Increase in income, as is often the case. Easy money policies and asset inflation have intensified the divergence. America’s billionaires have risen from 614 to 745 since the outbreak of COVID, while millions struggle to make ends meet and the super-rich pay very little income tax. Its wealthiest 400 families paid an average of about 8.2% tax on their annual inflows between 2010 and 2018, according to a White House study.
India is under similar financial pressure. Still, copying America could lead to worse consequences. Taxing paper property in a country where much of it is unlisted and difficult to identify could prove even more unjust. It could also stop the desirable wave of startups going public. As far as the bequest tax is concerned, first generation wealth creation in India is so rare that it cannot be found palatable. It will also fly in the face of inter-generational equity, as future heirs will be burdened in a way that previous heirs were not. Unlike in America, some of our wealthiest people made their own fortunes. Given how easy it is for the wealthy to move their wealth overseas, it can also set off a sudden flight of capital. Some of this is already in evidence, especially as India has raised levies on top earners to levels observed to discourage tax compliance. The very rush of a new inheritance fee could prompt wealthy families to simply emigrate, to hide wealth offshore under the guise of old and new, or to deprive our economy of its access. To fund our state’s outlay, it is better to rely instead on increased tax collections from rapid economic growth.
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