It’s Time To Consider A Wealth Tax That Could Reduce Indian Inequality

The most compelling reason is evidence that there has been a massive accumulation of wealth in the hands of a few. A small section of people have access to a large proportion of economic assets and resources that remain almost entirely untaxed and thus unavailable for public allocation. Wealth, much less income, has little to do with one’s education, ability, or efforts; It is largely dependent on the heritage and opportunities that come with the benefits associated with being one of India’s privileged classes and castes. According to the World Inequality Database, 2022, the top 10% of India’s population owns 65% of the country’s wealth, while the bottom 10% own only 6%. An Oxfam report highlights how India’s richest people doubled their wealth during the pandemic. This happened for a number of reasons, including profits on vaccines and commodity and asset price movements. But the fact remains that despite facing serious financial and economic challenges, India has no means to convert this growing wealth into productive resources that can generate employment opportunities and raise the income of majority of the people. , which in turn can increase the demand for goods—something that is necessary to combat economic drag-down.

One could argue – and it is common to hear – that money is better left to the rich, as they know best how to invest. This is not evidence enough, at least in India. The government reduced the corporate tax rate from 30% to 22% in 2019-20 despite the economic crisis caused by the pandemic. However, this did not lead to much private investment. Obviously, work is something else, and one cannot assume that wealth accumulated in private hands will be invested in the domestic economy.

Moreover, it is not only the investment that is important, but also where that investment is going and whether it is creating employment opportunities for the youth. Data from various sources show a high unemployment rate for youth during May-July 2022: 28.3% in the 15-24 age group (bit.ly/3IheGYl) and an even higher 43.3% for the 20-24 age group (bit.ly/3GbjdJi, The situation will worsen with the prospect of a global recession and related layoff announcements by corporate giants. The economic growth experienced in India recently, especially in the post-Covid recovery phase, has largely been jobless growth and could deepen both income and wealth inequality.

No economy can afford such youth unemployment rates for long without adversely affecting economic growth and social cohesion. India needs a change in its fiscal policy, as is being argued by many economists, to adopt measures that create employment opportunities and in turn demand for products made by small and medium scale producers let’s increase It will also spur growth while not necessarily widening inequalities. Such change would require public investment in two ways. Firstly, measures to revive confidence and boost capabilities of smaller actors in sectors such as agriculture, manufacturing and services. Two, essential public services that ensure enhancement of capabilities among youth, as well as generate employment opportunities that can generate demand for goods and services across sectors from smaller actors (i.e., investments in education and healthcare) . A highly potential source of revenue to finance such investments is property taxes.

Wealth tax, which is a direct tax as opposed to goods and services tax or value added tax, can take many forms such as wealth tax, inheritance or gift tax and capital gains tax. Capital gains tax exists in India, but applies only to transactions and is therefore limited in its base. India abolished its estate duty in 1985 and has no inheritance tax. Though the receipt of gifts is subject to income tax in the hands of the beneficiary, there are various exemptions; It is almost entirely exempt if received from within the family, which includes self and spouse’s extended family. These exemptions reduce the base considerably, as most of the accumulated wealth is earned through the family, and remains outside the purview of the gift tax. Given the cultural context of wealth inheritance, some exemptions make sense, but an upper limit could easily be added to make it more effective.

India currently has no wealth tax – that is, a tax levied on one’s entire wealth in all forms. It did not impose a one-off ‘solidarity tax’ on funds in the post-Covid budget, which could have generated resources for needed public investment. Several Latin American countries, including Argentina, Peru and Bolivia, have imposed or are introducing either a progressive annual wealth tax on each year’s wealth gains or a one-off Covid ‘solidarity’ tax. There is no reason why India cannot do the same. This is the right time to introduce a progressive wealth tax along with other fiscal measures that will directly reverse the trend of rising inequalities in the country.

Jyotsna Jha heads the Center for Budget and Policy Studies in Bangalore.