Should the wealth tax be reinstated in India?

Is it a good idea to reintroduce a wealth tax in India?

Ajay Shah: I’m not an enthusiast. We should never think about public policy from a standpoint of moral outrage. We should think about means and ends and the effectiveness by which certain objectives can be met. There are two kinds of difficulties. First, how are you going to measure the wealth of a person? If the government says that the measurement of wealth is the value of the assets of a person that are held in liquid assets like equities or debt, then people will get a strong bias in favour of holding assets like real estate and gold. In fact, it is harmful for the country when people emphasise holdings of real estate and gold because the productive assets of the economy are equities and the bonds. Second, people would just leave. If we say that we will tax the elite at a high rate, many will just leave and all the prospects of progress will get damaged.

Rahul Menon: It is time to start talking about it. Just announcing a wealth tax in a budget is not going to do anything. There needs to be a large institutional framework around it. There is a case for it right now simply because the levels of concentration of wealth are extremely high. I don’t think it is a moral problem to call out the inequality right now. It is a fundamental development problem, because an increase in inequality reduces capabilities and opportunities for many people. We have a sophisticated and strong system right now to track economic activity. We have implemented it for people at the bottom half of the pyramid. I don’t see why we can’t start thinking about using it at the top, which is a smaller population.

India had a wealth tax before it was abolished in 2016-17, but the collections were less than 1% of the gross tax collections. The government had said that the cost of collection of the wealth tax was really high. What were the issues then?

Rahul Menon: Much of the problem was what afflicts most economies when they undertake something like that, which is, how do you define this wealth? How do you define who is the owner of this wealth? It is easy to shift my wealth from one form of holding to another. I exercise effective control and in name alone it is with someone else. So, that enables me to evade tax. These problems will continue to persist [if we impose a wealth tax again]. This problem has also affected the developed world. Collections from wealth taxes are very low. In much of the literature that has been motivated by Piketty’s ideas, there are other interesting propositions that have come up to plug all these loopholes — have a comprehensive tax, don’t distinguish between labour and capital, tax real estate at the same rate as equity assets, etc.

Ajay Shah: I’m not convinced that inequality is an important problem for India. Growth is the only problem that we should focus on. All measures of well-being — infant mortality, female empowerment, or any measure of well-being — respond to growth alone. Redistribution never made a country better. There is no Marxian theory of value. There is only a market theory of value. So, a company is worth whatever a buyer is willing to pay for it. When there is a dislike of the elites, it creates unliveable countries and that is not a path to progress. So, we have really got to tamp down this rhetoric and get back to a more Gandhian approach. Let’s live together, make a good country. That is about building prosperity rather than getting into warfare about distribution.

Piketty’s work was based on data on income tax, consumption, wealth, national accounts, and rich lists, which might have issues, but those are not India-specific. How can we address this problem of data issues to get better approximations of inequality?

Ajay Shah: At the upper end of the distribution, there is no hope of meaningful data. So, the field investigator is never going to get this data and people are not going to realistically report on their income. Household survey data really does not capture the upper end of the distribution. I don’t know any other way to improve the data. There is the Forbes magazine ranking of the richest people in the world but that’s not a description of a country.

Rahul Menon: Yes, the surveys don’t give you a true picture of what’s happening at the top end. But there are ways. Piketty and other academics use the data from various wealth lists. Then, using economic techniques of interpolation, they combine these with surveys to get some amount of data over a period. Now it’s very clear that these are approximations, but they do give us a picture. One of the most important ways to do it is through international collaboration. The U.S. has tried doing that by signing agreements with other economies to develop more transparency.

There are two main contentions against the wealth tax. The first is flight of capital and the second is that when certain thresholds are imposed, some people/organisations will be incentivised to stay below that, which will widen the gap between the bottom half and the top half. How do you respond to these?

Rahul Menon: Yes, there may be flight of capital but there are some research papers that say that the scale of this is not too large in countries such as the U.K. and in Norway. In Norway, for instance, there is a lot to keep people there; there is a lot of public infrastructure. There is a reason to stay there even if your taxes rise. That is not the case in India. Wealth tax by itself means nothing unless it is used properly. So, the idea is to use this wealth tax and invest in health and education to create a more educated and healthy workforce. That gives a reason for people to continually invest here, even if the wealth tax is raised.

On the question of thresholds, thresholds for MSMEs don’t matter if I’m taxing just 0.04% [of the population]. They can grow until they reach 0.04% and that is when they will be taxed. Again, no one is talking about bringing about perfect equality. Some amount of inequality will always be there. But how much is too much?

Ajay Shah: The emergence of democracy in the U.K., starting from the Magna Carta in 1215, happened with generation after generation having enormous wealth and power concentrated with a few. That was way beyond anything that we see today. So, inequality is a fact of life.

Finally, I want to come to this idea that we should impose a wealth tax because it can be used for, say, health or education. This is wrong. It is a fundamental feature of public finance that you have a complete decoupling of expenditure and the revenues. I am disappointed that Piketty, a skilled economist, does not get this. We ask ourselves what are the good uses of public money and basically, they are public goods. I think there are only three good taxes in India — personal income tax, GST, and property tax. It is possible to implement these under Indian conditions as long as the rates are kept low with reasonably low distortions. Every other tax in the Indian public finance literature is termed ‘bad tax’.

Wealth tax might give some revenue for the social sector. But how do we address the issues in allocations in the same sectors?

Rahul Menon: There are huge problems with it. We have seen it in education. All the ASER (Annual Status of Education Report) and Pratham surveys say students are not up to the mark. There is a very legitimate question that if we tax billionaires and we put money there, are we just throwing good money after bad? But levying a tax and using it for spending allows us to finance a lot of development goals. It also allows us to do this without necessarily running a deficit, without necessarily borrowing from the public.

Ajay Shah: There is no merit in that idea. The education system is terrible. It is not efficient to put more money into that problem; we have a management crisis. I feel that the wise approach in India is to choke expenditure until you prove bang for the buck. A meaningful expenditure ratio for India at the present level of development is about half of what is spent today.

Listen to the conversation in The Hindu Parley podcast

Published – December 27, 2024 01:57 am IST