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Wealth Tax in India
Context:
In a recent panel discussion in New Delhi, French economist Thomas Piketty suggested that a wealth and inheritance tax be imposed on the super-rich in India, which, in turn, could fund health and education. India’s Chief Economic Advisor, Anantha Nageswaran, opposed the idea, arguing that higher taxes could encourage fund outflows.
About Wealth Tax
- Definition: Wealth tax is imposed on the net market value of various assets owned by an individual, including cash, bank deposits, shares, fixed assets, personal cars, and real property.
- Global Application: Countries like France, Portugal, and Spain levy wealth tax to target unproductive and non-essential assets, ensuring equitable taxation.
History of Wealth Tax in India:
- Introduction and Early Years
- Introduced under Nehru’s socialist policies to target the wealthy, governed initially by the Indian Income Tax Act, 1922.
- The Wealth Tax Act, 1957, was influenced by the Kaldor Committee’s recommendations to address evasion.
- Challenges and Modifications
- High tax rates and procedural complexities led to evasion.
- Liberalisation in 1991 narrowed the tax’s scope to unproductive assets.
- Abolishment in 2015
- Discontinued due to administrative inefficiencies, litigation, and negligible revenue.
- Replaced by a 2% surcharge on wealthy taxpayers
Why India Needs a Wealth Tax:
- Addressing Inequality: The top 1% of earners account for 22% of national income, and the top 5% for 40%.
- Boosting Public Revenue: India’s tax-to-GDP ratio of 17% is far below global standards.
- A wealth tax can tap into significant revenue from undisclosed earnings and speculative assets.
- Economic Growth Potential: Redirects funds from speculative markets to productive investments.
- Increases demand through higher public spending on health and education
Should India Reintroduce a Wealth Tax?
Arguments Against a Wealth Tax
- Challenges in Measuring Wealth: Difficulties in accurately measuring wealth, particularly in real estate or gold, which are harder to tax and less productive.
- Capital Flight Risks: Potential exodus of wealth and talent due to high taxes on the elite, harming economic growth.
- Historical Inefficiencies: India’s earlier wealth tax (pre-2015) collected less than 1% of gross tax revenue, undermined by high collection costs and loopholes.
- Focus on Growth Over Redistribution: Emphasis on economic growth as a better driver of well-being compared to redistribution.
- Resource Allocation Challenges: Management inefficiencies, not funding, are the primary issue in sectors like education.
Arguments Supporting a Wealth Tax:
- Addressing Extreme Inequality: Extreme wealth concentration reduces opportunities and capabilities for the broader population.
- Improved Institutional Frameworks: Advances in data collection and international cooperation can make wealth measurement and tracking feasible.
- Revenue for Development Goals: Taxing the super-rich can generate funds for critical sectors like health and education.
- International Comparisons: Countries like Norway show wealth taxes can coexist with wealth retention when backed by robust public infrastructure.
Broader Perspectives
- Redistribution as a Public Good: Wealth tax can fund development without increasing fiscal deficits or borrowing.
- Focus on Low-Distortion Taxes: Efficient taxes like GST, property taxes, and income tax should remain central to public finance policy.
- Historical Lessons from Inequality: Economic growth and democracy can thrive despite inequality, as seen in the U.K.’s evolution.
- Targeting Only the Wealthiest: A wealth tax targeting the top 0.04% avoids burdening MSMEs or the middle class.
Challenges in Implementation:
- Defining and Tracking Wealth: Complexity in identifying and valuing wealth due to its potential to be disguised or transferred.
Effective Allocation of Revenue: Risks of resource wastage in governance and public spending without systemic reforms.
