If you are wealthy, should you pay more taxes?
Growing economic inequality, fiscal deficits, and social justice concerns have made the debate about why the rich should be taxed more increasingly popular!
Those favouring increased taxation on the wealthy argue that it has become critical to address the widening income and wealth gaps, fund essential public services, and reduce budget deficits. Pointing out that wealth concentration among society’s most affluent has reached unprecedented levels, with the wealthiest individuals and corporations enjoying significant tax advantages that have worsened inequality.
Addressing the problem of crucial revenue needed by governments to invest in infrastructure, healthcare, education, and other public goods could also be solved by higher taxes on the wealthy, promoting a more fair and prosperous society.
Those in favour point to historical periods of high taxation on the rich, such as the mid-20th century in the United States, which coincided with robust economic growth and declining inequality.
On the other hand, opponents argue that higher taxes on the wealthy could have just the opposite effect on the economy – discourage investment, entrepreneurship, and economic growth and lead affluent individuals and businesses to relocate to lower-tax jurisdictions, resulting in job losses and reduced economic activity in higher-tax regions.
Likewise, critics also express concerns about the efficiency and effectiveness of government spending, suggesting that merely raising taxes without ensuring responsible fiscal management may not yield the desired social and economic benefits.
What Constitutes Fair?
The debate is further complicated by differing views on what forms “fair” taxation and the most effective tax structures. While some advocate for progressive income taxes, others call for wealth taxes, capital gains taxes, or closing loopholes and tax havens.
However, this complicated debate reflects broader societal questions about fairness, economic policy, and the role of government in redistributing wealth.
The Beginnings
Taxes on accumulated wealth date back centuries. They originated in ancient civilizations such as Mesopotamia, Egypt, Greece, and Rome, where taxes were imposed on acquired and inherited property.
Rome, for instance, levied the Patrimonium tax on the total wealth of its citizens. In medieval Europe, feudal societies relied on wealth taxes to fund wars and support monarchies.
In France, as a European monarchy, the ‘taille’ was collected as a direct tax on households based on the amount of land held. In the UK, estate duties were introduced to combat rising wealth inequality during the industrialization of the 18th and 19th centuries.
It was after World Wars I and II, with the United States introducing federal estate and gift taxes in the early 20th century, that Wealth taxes gained prominence.
However, by the 21st century, many countries have scaled back these taxes due to their relatively insignificant contribution to overall tax revenues, administrative challenges, and concerns about their economic impact.
Should The Wealthy Be Taxed In India?
A new study co-authored by economist Thomas Piketty suggests that India should impose a wealth tax on the ultra-rich to address wealth inequality and create fiscal space for social sector investments.
The paper, released on Friday, proposes a 2% annual tax on net wealth exceeding Rs 10 crore and a 33% inheritance tax on estates valued over Rs 10 crore.
It estimates that these measures could generate revenue equivalent to 2.73% of the gross domestic product (GDP).
According to the study, 0.04% of the adult population holds more than a quarter of the total wealth, and imposing this tax would affect only this small fraction, leaving 99.96% of adults unaffected.
“Progressive wealth taxation, effective redistribution, and broad-based social sector investments are urgently needed to build an equitable and prosperous India,” said Anmol Somanchi, one of the report’s four authors. The other authors of the report are Nitin Kumar Bharti and Lucas Chancel.
The additional revenue generated from the proposed taxes would nearly double the current public spending on education and other social sectors.
The report follows an earlier paper by the World Inequality Lab, which noted that Inequality in India has widened since the early 2000s. In 2022-23, the income and wealth share of the top 1% of the population rose to 22.6% and 40.1%, respectively.
The study also points out that the income share of India’s top 1% is among the highest globally, surpassing even South Africa, Brazil, and the US. India had previously experimented with estate, wealth, and gift taxes, but these were abolished due to low collections and high administrative costs.
The Distractors Viewpoint
Many people believe that the wealthy in India have amassed their fortunes through dubious means, such as tax evasion or defaulting on loans from state-owned banks.
With rising income and wealth inequality, organizations like Oxfam International have called for India to tax the rich more to raise funds to help the poor.
However, many point out that India’s effective top-income tax rate is already very high at 42.77%.
Increasing this rate further would penalize honest taxpayers while encouraging others to hide their income. Therefore, New Delhi should consider lowering tax rates, broadening the tax base, and closing loopholes in the system.
Advocates for higher taxes often compare India’s rates to those in Scandinavian countries; however, these arguments overlook the high quality of public goods and services that taxpayers in those countries receive in return.
This contrast – the combination of high taxes and poor civic amenities in India has primarily driven wealthy individuals to leave the country.
To put it into perspective, Immigration consultancy Henley & Partners estimated that more than 8,000 Indian millionaires would emigrate by the end of 2024, taking most of their wealth with them.
Why The Rich Are Needed
Broadly, we may resent the rich, but the country needs to retain them to boost investment, especially as India’s savings rate has been declining.
The nation’s savings as a share of GDP fell to an estimated 26.2% in September from 37% in 2007.
Therefore, more investment is essential to create jobs for the millions of young Indians entering the labour market, as foreign direct investment alone is insufficient to bridge the gap.
The government needs to dismantle the unhealthy nexus between big business and government, which allows cronies to exploit regulations for their own gain.
This requires addressing issues related to the ease of doing business in India and removing entry barriers that stifle competition, harm consumers, and concentrate economic power.
What Can Be Done
In recent years, India has increasingly relied on indirect taxes, such as the national goods and services tax introduced in 2017.
However, many have argued that these taxes tend to be regressive, impacting the poor more than the rich, unlike direct taxes based on income levels.
India’s income tax system can be made more effective without raising rates.
One approach is to close the loophole that exempts agricultural income from taxation, which primarily benefits wealthy farmers, as suggested by the Economic Advisory Council to the Prime Minister.
This loophole has become a conduit for money laundering, as black-market cash and collected bribes are often declared as agricultural income. It has been observed that many top bureaucrats, film actors, and politicians claim to be farmers.
For fairness, employment, financial, and other types of income should ideally be taxed at the same rate. Capital gains on stock and fund investments are currently taxed at just 10% to 15%.
However, levelling these rates is not feasible at this time because raising taxes on financial income would likely drive households to shift their savings from stocks to gold and land, which are less economically productive, generate lower returns, and encourage tax avoidance.
Also, India’s complex multitier GST structure and high import duties incentivize businesses to misinvoice to reduce tax liabilities.
Reducing the gap between corporate and personal income tax rates would benefit India’s many small businesses.
While limited companies enjoy a discounted tax rate, sole proprietorships, partnerships, and limited liability partnerships—which comprise three-quarters of Indian businesses—pay the full rate.
Fixing this imbalance would make the tax regime more progressive and boost demand in the economy while broader measures to control inflation and reduce bureaucratic compliance burdens on small businesses would have similar benefits.
Heavier taxes on income earned through entrepreneurship and innovation will deter potential investors, slowing economic growth and hurting all Indians, including the poor.
Instead of effectively subsidizing large corporations with tax breaks, the Indian government should increase spending on public healthcare and education.
This would enhance human capital development in an economy dominated by a labor-intensive services sector, and it would be a better way to reduce income and wealth inequality than raising tax rates.
1) Fight inequality
Rising inequality has been an unavoidable aspect of global economic development over the past 200 years.
According to the United Nations’ Sustainable Development Goals, increasing inequality affects 70% of the global population and threatens long-term social and economic development.
This leads to poverty reduction efforts and diminishes people’s sense of fulfillment and self-worth, leading to crime, disease, and environmental degradation.
2) Proposal for a Wealth Tax
As a key response, civil society organizations, social movements, the media, and academics have proposed a wealth tax on a country’s richest citizens.
A wealth tax is a levy imposed on an individual’s net worth, including all forms of acquired wealth.
Despite significant resistance from both the government and the corporate sector, proponents have emphasized the need for a wealth tax given the current political, social, and economic conditions.
3) Addressing inequality
The primary rationale for a wealth tax is to counteract the long-standing trend of rising inequality and promote social equity.
Economist Jomo Sundaram accentuates the importance of generating more revenue from those most capable of paying while alleviating the burden on the needy.
Interestingly, both the World Bank and the International Monetary Fund (WB-IMF) have endorsed the idea of a wealth tax to combat rising global inequalities.
During a joint WB-IMF conference on October 19, 2021, it was noted that persistent income inequality requires a progressive tax policy as a key tool for addressing such disparities.
4) Responding to Social Unrest
Additionally, a wealth tax aims to address social unrest and discontent.
Instances of unrest driven by inequality include the Occupy Movement of 2011–12, the London riots of August 2011, the Yellow Vests revolt in France in 2018, and movements like Black Lives Matter, #MeToo, and Fridays for Future.
These movements have mobilized people around issues of racial, gender, and climate inequalities, transcending national borders and generations.
A significant concern emphasized by these movements is corporate greed, where economic and political power is perceived to be in direct conflict with democratic principles.
5) Regressive Tax System?
Another rationale for a wealth tax is to address the current regressive tax system prevalent around the world.
Despite the wealth of the richest growing exponentially, their tax rates have significantly decreased. In contrast, the tax rates for low-income working classes have become higher than those for billionaires.
Over the past four decades, governments have implemented tax reforms that favour regressive and consumption taxes while reducing taxes on corporations and the wealthy. This has shifted the tax burden from the upper classes to the poorer classes.
6) Rampant Tax Evasion
The wealthiest individuals are notorious for rampant tax evasion.
The world’s top billionaires, especially the owners of Amazon, Apple, Facebook, Google, Microsoft, and Netflix, have avoided paying billions in taxes by transferring their wealth to tax havens and setting up shell companies.
Research shows that top billionaires like Warren Buffet, Jeff Bezos, Michael Bloomberg, and Elon Musk have tax rates ranging from 0.10% to 3.27%, while corporate tax rates hover around 35%.
Example – Phillipines
In the Philippines, the wealthiest individuals are not necessarily the top income taxpayers.
The Department of Finance’s Tax Watch service revealed that in 2012, only 25 out of the 40 richest Filipinos (as reported by Forbes) were on the Bureau of Internal Revenue’s (BIR) list of top individual taxpayers.
Even when rich tax evaders are identified and charged, they often escape prosecution or penalties.
The BIR’s “Run After Tax Evaders” project has a poor accomplishment record, resolving only 14 out of 929 cases from 2005 to December 2018, with only 10 convictions.
7) Corporate Tax Breaks
Yet another reason for a wealth tax is that, in addition to underpaying corporate taxes, the richest individuals and families benefit from substantial corporate tax breaks and tax holidays granted by governments.
Special economic zones (SEZs) often suspend normal tax regulations.
For example, in the Philippines, while the regular corporate tax rate is 25%, firms in SEZs pay no more than 5%.
They also enjoy perks like tax-free imports and exports, while the government covers infrastructure costs.
8) Unearned Profits And False Profits
A significant portion of the wealth held by billionaires comes from unearned superprofits that are not reinvested into the economy.
These profits exceed normal rates of return and are often based on non-productive activities.
Global firms generate “false profits,” which are not based on value-added or economic activities; the accumulation of wealth is unrelated to their economic roles.
Therefore, if we weigh the merits and drawbacks of Wealth Taxes, the once that stand in favour are the following –
Addressing Inequality: Wealth taxes can help reverse the growing disparity between the rich and the poor. By redistributing wealth, these taxes can promote social equity and ensure a fairer distribution of resources.
Generating Revenue: Additional revenue from wealth taxes can be used to fund essential public services such as healthcare, education, and infrastructure, which benefit society as a whole and particularly aid those in need.
Reducing Tax Evasion: A more progressive tax system can close loopholes and reduce tax evasion, ensuring that the richest individuals pay their fair share.
Social Stability: By addressing the root causes of social unrest and economic discontent, wealth taxes can contribute to greater social stability and cohesion.
Now, let us look at the significant drawbacks and challenges associated with implementing wealth taxes –
Administrative Challenges: Wealth taxes can be difficult to administer and enforce. Valuing assets accurately, especially non-liquid ones, requires substantial administrative effort and resources.
Capital Flight: High wealth taxes might encourage the wealthy to move their assets or themselves to jurisdictions with lower taxes, reducing the domestic tax base and potentially harming the economy.
Investment Deterrence: Heavy taxation on wealth could deter investment, innovation, and entrepreneurship, potentially slowing economic growth and job creation.
Tax Avoidance and Evasion: The wealthy often have the means to employ sophisticated tax avoidance strategies, making it difficult for governments to collect the intended revenue.
Therefore, the answer lies in the balancing act, the decision to impose higher taxes on the wealthy must balance the potential benefits of increased revenue and reduced inequality against the risks of administrative complexity, capital flight, and reduced investment.
Policymakers need to design tax systems that are efficient, fair, and capable of capturing wealth without stifling economic growth.
Implementing complementary measures such as closing tax loopholes, improving tax compliance, and investing in administrative capacity can help mitigate some of these challenges.
Additionally, ensuring that the tax revenue is transparently and effectively used for public goods can bolster public support and enhance the overall impact of wealth taxes.
The Last Bit
We need the wealthy!
While wealth taxes present both opportunities and challenges, a well-considered approach that addresses potential drawbacks can make them a viable tool for promoting greater economic justice and social equity.
