Answer

A wealth tax is a direct tax levied on an individual’s net wealth, aimed at addressing rising inequality. India’s history with wealth tax, abolished in 2016 due to administrative inefficiencies, reflects its complexities. Globally, countries like France have reformed or replaced wealth taxes, citing economic growth concerns. This raises questions about its feasibility in India’s socio-economic context.

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Wealth Tax: Solution to Rising Inequality

• Reducing inequality: Wealth tax can reduce the concentration of wealth and bridge the income gap, promoting a more equitable society.
  For example: Thomas Piketty proposed a 2% annual wealth tax to reduce disparities as the top 1% owns 40% of India’s wealth.
• Funding Social Schemes: Revenue from wealth tax could finance social safety nets, aiding marginalized communities.
  For example: Revenue could be allocated to schemes like PMKVY(PM Kaushal Vikas Yojna) to uplift daily wage earners in rural India.
• Progressive Tax System: Wealth tax enhances progressivity, ensuring that the rich contribute proportionally more to national revenue.
  For example: OECD countries like Norway apply wealth taxes to balance high-income disparities through progressive fiscal policies..

Implementation faces challenges

• Administrative challenges: Wealth tax requires complex valuation of assets like real estate and gold, leading to litigation and high administrative costs.
  For example: In 1985, inheritance tax collection cost outweighed its revenue, leading to its abolition by V P Singh.
• Tax evasion: High-net-worth individuals often find loopholes or underreport asset values to evade taxes, defeating its purpose.
  For example: In 2020, reports highlighted how billionaires like Jeff Bezos legally avoided wealth tax obligations by leveraging unrealized gains and strategic asset valuations.
• Global mobility of wealth: Tax may lead to capital flight, as seen with wealthy Norwegians moving abroad post-tax hike.
  For example: Around 5,100 Indian millionaires relocated in 2023 due to financial considerations, per Henley & Partners report.

Challenges in the Feasibility of Implementing a Wealth Tax in India Considering Historical Experience and Global Trends

• Abolition due to inefficiency: India’s wealth tax was abolished in 2015 due to low yield and high costs.
  For example: Arun Jaitley noted wealth tax’s contribution was insignificant to total revenue during his 2015 Budget speech.
• Global trends: Wealth taxes have declined globally, with only four OECD countries implementing them by 2017, citing inefficiency.
  For example: Countries like Sweden and the Netherlands abolished wealth tax due to challenges in implementation and revenue.
• Historical evasion patterns: Wealth tax often leads to innovative evasion tactics, as seen across centuries.
  For example: Ancient Egypt documented tax evasion through property undervaluation as early as the 7th century BCE.
• Revenue limitations: Wealth tax in various countries, including India, failed to achieve redistribution objectives due to low collections.
  For example: In 1985, V P Singh stated the inheritance tax yielded ₹20 crore, insufficient for financing development.
• Administrative costs: High administrative costs often outweigh benefits, deterring countries from continuing wealth tax regimes.
  For example: Switzerland’s canton of Basel experienced inefficiencies in managing wealth tax compliance since 1840.

Challenges in Feasibility of Wealth Tax in India considering Economic Growth and Social Equity

• Economic growth risk: High wealth taxes may deter investments and slow economic growth, discouraging entrepreneurial activities.
  For example: Norway’s tax hike led to wealthy individuals relocating, impacting the country’s economic base.
• Capital flight: Wealth tax risks pushing wealthy individuals to move abroad, reducing domestic capital and innovation.
  For example: India experienced a flight of 4,300 millionaires in 2023 due to tax concerns and better opportunities abroad.
• Social equity improvement: Revenue can enhance state schemes, addressing inequities in health, education, and housing.
  For example: Revenue from a wealth tax could augment Ayushman Bharat, improving healthcare for underprivileged sections.
• Redistribution limited: While targeting wealth, tax fails to address structural inequities in income distribution and opportunities.
  For example: Free food grains under the National Food Security Act benefit poor households more than redistributive taxes.

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Way Forward for Implementing Wealth Tax in India

• Enhancing administrative efficiency: Leverage technology like AI and blockchain for better asset valuation, compliance tracking, and reducing litigation costs.
  For example: Estonia uses e-governance systems for efficient tax administration, improving compliance and reducing evasion.
• Tiered tax structure: Introduce a graduated wealth tax with higher thresholds to ensure it targets only the ultra-rich, reducing capital flight risks.
  For example: France implemented a solidarity tax on wealth, exempting middle-income households and focusing on ultra-wealthy individuals.
• Strengthening global cooperation: Collaborate with other countries to address capital flight through international agreements on tax reporting and transparency.
  For example: The OECD’s Common Reporting Standard (CRS) facilitates global information exchange to curb cross-border tax evasion.
• Asset diversification consideration: Exclude illiquid assets like gold and real estate initially and focus on easily assessable financial wealth for practicality.
  For example: Switzerland levies wealth tax primarily on bank deposits and stocks, avoiding the complexities of immovable asset valuations.
• Promoting voluntary compliance: Introduce incentives like tax rebates for investments in social sectors to encourage the wealthy to voluntarily pay wealth taxes.
  For example: The United States tax deductions for charitable donations motivate high-net-worth individuals to contribute to public welfare.

India can integrate technology-driven solutions like AI-powered wealth tracking and blockchain-based transparency to prevent evasion. Leveraging schemes like the Direct Benefit Transfer (DBT) to channel revenues toward targeted poverty alleviation and investing in social infrastructure can ensure redistributive justice. Strengthening global cooperation on wealth taxation can address cross-border challenges and enhance equity.

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