January 18, 2023
Good morning. In today’s either/view, we discuss whether a wealth tax for the rich can solve India’s wealth inequality problem. We also look at the hot air balloon festival in Uttar Pradesh, among other news.
📰 FEATURE STORY
India’s Wealth Inequality Problem: Can A Wealth Tax Solve It?
We have a new report by the international confederation of NGOs, Oxfam International, which states that the last few years have stationed India at the precipice of staggering wealth inequality. In 2021, India’s top 1% owned more than 40.5% of its total wealth, while the bottom 50% of the population owned 3% of wealth cumulatively, it reports.
Of course, this didn’t come as a surprise to many, but the disparity numbers did indeed drive the point home. The report’s prime suggestion to India’s finance minister Nirmala Sitharaman is to permanently tax the top 1% on their net assets. Keeping in mind the present government’s policy of corporate exemption and India’s complicated relationship with direct tax, how good of a solution is a wealth tax to bridge the wealth gap?
Context
India, set to secure the third spot in the World Economic League table by 2037, harbours the world’s largest share of the poor. All is not well for the Aam Indian. The country’s world-beating economic growth is the jobless kind and is not accompanied by sufficient investment in public expenditure, such as health, education, infrastructure, and employment. After 2016, the unemployment rate rose from 5% to 7-8%, and it now stood at a 16-month high of 8.3% in December 2022.
And who are the hardest hit in this successful growth story? People employed in unproductive sectors, informal workers, the youth, women, Scheduled Tribes (STs) and other marginalised groups. To put things into perspective, it will take a female domestic worker 22,277 years to earn what a top CEO of a technology company makes in one year. Female participation in the labour force is another unnerving statistic; it has dropped from 26% in 2010 to 19% in 2020 to 9% by 2022.
So it is that in India, the top 30% own over 90% of wealth; the top 10% own over 72% of the wealth; and the top 5% own nearly 62%. With the poor remaining poor and the marginalised further sequestered, billionaires in India have increased from 102 in 2020 to 166 in 2022.
India’s story forms part of the global swing towards unregulated capitalism, where historic economic gains have been made at the expense of the poor and the everyperson. The United States is its flagbearer, housing 735 billionaires and dedicating two-thirds of its $42 trillion wealth to the richest 1%.
To reduce this increasing inequality, Oxfam’s report asks governments to immediately intervene with a permanent wealth tax: even a marginal tax deduction from 1-5% of the richest 1% would bridge the gap between the lives of the poor and the billionaires. Other forms of wealth redistribution include windfall taxes and one-off solidarity taxation. The former refers to a tax that is imposed on certain industries that accrue unprecedented profits due to extraneous factors.
Consider the fact that energy companies more than doubled their profits in 2022. India’s energy mogul, Gautam Adani’s wealth increased by 46 percent in 2022 because he could capitalise upon economic recovery processes and rising energy prices.
In a bid to boost investment, growth, and employment, the incumbent government slashed corporate tax from the previous 30% to 22%, amounting to a ₹1.84 lakh crore loss of the state’s revenue. Accompanying this was a reduction to 15% tax on new enterprises. This loss was going to be mitigated by increasing taxes on everyday items – our roti, kapda, and petrol-diesel. This means that household savings were more likely to decline while corporate savings swelled.
In some ways, this policy proves antithetical to Oxfam’s key recommendation of a progressive tax regime. Pro-business policies have ultimately contributed to creating unequal opportunities for employment and growth, the latest proof of which was made visible by rural inflation topping urban inflation since January 2022. How beneficial, then, could a wealth tax be in an economy where growth seems to be inextricably tied up with inequities?
VIEW: It’s a win-win
The need of the hour is for India’s fiscal policies to directly tackle the challenge of economic inequality and equitable employment generation. Pro-business policies are not sustainable for India’s economic stability. Ignoring the massive wealth inequalities and facilitating growth stories of the rich may work for the time being, but its benefits will be short-lived since a majority of the country shoulders a higher tax burden than the top 1% in the form of the indirect GST.
The decline in health, education, and employment indicators proves fallacious Sitharaman’s assumption that the accumulation of wealth with the 1% will trickle down to the rest. It is also clear that since the time Prime Minister Narendra Modi announced Make in India and Sitharaman championed corporate tax cuts, India is yet to witness investments proportionate to the legion of supply-side measures of inducing capital formation. It has been recorded that fixed private capital formation is declining at 6% while private investment as a ratio of GDP has also declined.
A wealth tax, when clubbed with sufficient public expenditure, has historically proven effective in reducing economic inequality. For instance, several welfare schemes targeting education, health, and employment have witnessed a lack of funds: the funds for Samagra Shiksha in 2022-23 were only 64% of the original amount requested by the education ministry; the plan for a breakfast scheme accompanying PM Poshan Yojana or midday meal suggested by the National Education Policy was rejected due to lack of funds; and the National Health Mission (NHM) has witnessed a steady decline in funding since its debut in 2004.
Studies until now have shown that there is no definitive negative impact of wealth tax on entrepreneurship. Contrarily, a joint study finds that wealth and inheritance taxes could be reintroduced in India by incentivising donations. Fiscal policies prevailing as they are, a progressive wealth tax on the rich will allow the government to pursue inclusive growth by redistributing tax revenue towards public welfare.
COUNTERVIEW: It doesn’t seem likely soon
Wealth taxes have a bleak future in India due to a poor tax collection system and a complex tax regime. In fact, India ranks as the second-most complex tax jurisdiction after China. Unless the entire tax system is structurally overhauled and simplified, the merits of a wealth tax are unlikely to be reaped.
India has dabbled with a wealth and inheritance tax in the past, with little success. Widespread tax evasion and financial engineering by the rich led to its revocation in 2016. It was found by the incumbent government that levying a wealth tax proved to be an administrative and fiscal nightmare for successive governments: the costs of tax collection and investigation far exceeded the recovered amount. Since the past laws suffered from detrimental design flaws, their re-introduction would require designing a completely robust mechanism along with equipping tax authorities with sufficient knowledge and resources.
Amidst the global economic slowdown, the government is likely to prioritise a stable tax regime based on proven results from recent years. A panel of experts gathered for a pre-budget roundtable also opined that any tax hikes and levies would be unjustifiable due to prevailing economic uncertainties. It is also pertinent to note that with general elections around the corner, the top brass will also want to savour their ties with India’s rich industrialists rather than sever them. This means that any plans to re-introduce wealth and inheritance are likely to be put on hold for a later time.
An annual, permanent wealth tax could prove less efficient than a one-off wealth tax. Under such a regime, people who gave away their wealth would be taxed lesser than the people who saved. Apart from presenting a philosophical conundrum whereby people are penalised for saving, this would also prove counterintuitive to the idea of progressive taxation. Two billionaires from the US argue that people who have amassed wealth are better suited to spend their money wisely than politicians. While only a claim, this does point to a perennial problem of investment and aid that governments receive, which they fail to appropriately redirect to welfare schemes.
Reference Links:
- Is This a Lost Decade for Indian Manufacturing? – The Wire
- Budget 2019: Underfunding of National Health Mission Continues – The Wire
- Why ‘Make in India’ has failed – The Hindu
- Government hikes GST for household items – The Hindu
- Can India go back to a wealth tax by appealing to the better side of the rich? – The Economic Times
- Budget 2023: Avoid higher taxes, extend presumptive tax to service sector – Fortune India
- Making Money Is a Patriotic Act – Wall Street Journal
- The economic arguments for and against a wealth tax – Fiscal Studies
What is your opinion on this?
(Only subscribers can participate in polls)
a) India’s wealth inequality problem can be solved by imposing a wealth tax on the top 1%.
b) India’s wealth inequality problem cannot be solved by imposing a wealth tax on the top 1%.
🕵️ BEYOND ECHO CHAMBERS
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For the Left:
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🇮🇳 STATE OF THE STATES
Hot Air Balloon Fest (Uttar Pradesh) – The Kashi Balloon and Boat Festival began in the city of Varanasi in Uttar Pradesh yesterday. The festival will be held for four days and will end on 20th January. The boat race will map a 3-kilometre-wide stretch of the Ganges between Dashashwamedh and Namo ghats. Morning flights, tethered flights, and night glow will all be organised as a part of the hot air ballooning festival for the enjoyment of the attendees. Hot air balloon launch and potential landing locations have also been decided upon.
Why it matters: The tourism department of Uttar Pradesh will be organising this event for the second time after its success in 2021. It serves as a very attractive event for tourists and acts as a good revenue generator for the Uttar Pradesh government as well, as various brands wish to advertise themselves on blimps and balloons. During the festival, paramotor activities will also be organised. The tourist administration also disclosed that for the hot air balloon festival, they had secured the services of agencies from five nations, including the US, Japan, and Canada.
Hyderabad To Become Industrial Revolution Center (Telangana) -The first thematic centre in India to concentrate on life sciences and healthcare, the World Economic Forum Center for Fourth Industrial Revolution, will be established in Hyderabad. The World Economic Forum and the Telangana government inked a partnership agreement on Monday during the Forum’s annual gathering in Davos, and the announcement followed. The Center—C4IR Telangana—will be an independent, non-profit entity that will oversee policy and governance for healthcare and the life sciences.
Why it matters: The centre will be crucial in modernising the local, international, and healthcare industries and enhancing patient access and results. It would hasten innovation in service and product delivery across the whole Indian healthcare sector. India has a special chance to lead South Asia in healthcare and life sciences. With the backing of the state and federal governments in India as well as the Forum’s global network of Fourth Industrial Revolution centres, C4IR Telangana will play a significant role in fostering stakeholder engagement, creating links between the public sector and SMEs, and assisting in the creation of jobs in the healthcare industry.
Vistara To Open Flights From Goa (Goa) – On Tuesday, Vistara Airlines announced that it would start operating from Manohar Airport in North Goa on February 14. The airline will start operating flights from North Goa to Mumbai and Bengaluru. With this, the airline joins the group of companies that have started using the new airport in Goa. On the route between Goa and Bengaluru, passengers will be able to use the carrier’s daily flights. On the other hand, the Goa-Mumbai route will have six weekly flights. Airline tickets are available through Vistara at a price beginning at ₹2,400.
Why it matters: The new network will meet the rising demand brought on by Goa’s status as a top destination for leisure travel, and it will provide passengers with more choices, lower the cost of travel, and improve direct access to North Goa. South Goa’s current Goa Dabolim Airport will continue to operate.
Sikkim Incentivises Population Growth (Sikkim) – Prem Singh Tamang, the chief minister of Sikkim, has proposed a special increment for women employees who give birth to a second baby and two increments for a third child in order to encourage childbirth among indigenous communities to combat declining fertility rates in the nation’s least populous state.
Why it matters: With one child per woman, Sikkim’s fertility rate saw the lowest growth rate in recent years. The chief minister urged that there is a need to provide locals with incentives to have more children to reverse the dropping fertility rate. The Sikkim Krantikari Morcha-led cabinet had also announced on November 14, 2021, that women in government jobs would be entitled to 365 days of maternity leave, and new dads may avail of paternity leave for 30 days. The plan to encourage people to have more children may be a first by any state. Tamang Singh also stated that his administration was pushing the development of IVF facilities in hospitals around Sikkim to urge women who were unable to conceive for a variety of reasons to pursue medical intervention.
First Govt. Engineering College in Meghalaya (Meghalaya) – Conrad K. Sangma, the chief minister of Meghalaya, on Monday officially opened the state’s first government engineering institution, Shillong Government College of Engineering. Rashtriya Uchchatar Shiksha Abhiyan (RUSA) took on the project, which cost ₹26 crores to complete and was built in the Mawlai region.
Why it matters: With a capacity of 30 students for each field, the engineering college will provide degree programmes in three technological branches: mining engineering, electrical engineering, and civil engineering. In his speech, the chief minister stated that the young had been the focus of his administration for the past five years, and as a result, a number of programmes have been launched. According to him, the government has interviewed and researched over 90,000 young people and has developed a plan to harness their potential. He said that this research had been used to guide other government initiatives in the fields of business, sports, and music.
🔢 KEY NUMBER
1975 – The last time India won the Hockey World Cup. Will India be able to do it in 2023?