Wealth Inequality and the Debate on Wealth Tax

Context

As per a report of the World Inequality Lab (Income And Wealth Inequality In India, 1922-2023), inequality has risen worldwide, especially after COVID-19. 

Rising Economic Inequality

• Rising Inequality Worldwide:

• • Top 1% Dominance: The top 1% accounted for more than two-thirds of wealth generation since 2020.
  • Bottom 50% Marginalised: The bottom 50% own only 2% of the world’s wealth.

• Concerning Condition in India: 

  • Economic Inequality in India is worse than the colonial period, with the top 1% owning 40% of India’s wealth and taking away 22.6% of national income every year.
    • India’s Inequality is one of the highest in the world.

• Rousseau on Economic Inequality: 

  • Rousseau argued that economic inequality stems from the institution of private property and the resulting accumulation of wealth by a minority, leading to a disparity in power and freedom.
    • “Eat the Rich” is commonly attributed to Rousseau, a renowned political philosopher and leading figure in the French Revolution: “When the people shall have nothing more to eat, they will eat the rich.”

The Case for a Wealth Tax

• Failures of Current System: The present taxation system is failing to redistribute wealth. Super rich avoid income tax through low salaries and wealth in shares/property. The Kuznets curve theory (inequality rises then falls with development) has failed.
• Potential Benefits: A 2% wealth tax on the super-rich could fund health, education, and reduce inequality. 

What is Wealth Tax?

• A Kind of Direct Tax: A direct tax on individual assets such as cash, shares and property.
• India’s Wealth Tax Act: India’s Wealth Tax Act 1957 imposed a 1% tax on earnings over Rs 30 lakh/year. The Act was introduced in 1957 but repealed in 2015 due to improper implementation.
• Global Presence: Wealth tax still exists in some countries like Switzerland, Norway and Spain.
  • G20 finance ministers are also discussing a global minimum tax on billionaires.
• Generation of High Revenue: The European tax think tank, EU Tax Observatory, has recommended a global minimum tax of 2% on billionaires’ wealth, which could generate around $250 billion annually. 
  • They also called for a strengthened global minimum tax on multinational companies, which could raise an additional $250 billion per year.

Arguments in Favour of Wealth Tax

• Reduces Wealth Gap: A wealth tax reduces the wealth gap and creates a fairer society.
• Contribution to Society: The rich should pay more for benefiting from society’s resources.
• Funds Public Goods: Wealth tax revenue can fund public goods and services.
• Encourages Investment: A wealth tax encourages productive investment over hoarding.

Arguments Against Wealth Tax

• Flight of High Net Worth Individuals: A wealth tax could lead to the flight of high-net- worth individuals from the country.
  • As per the Henley Private Wealth Migration Report of 2023, India is the country with the second-highest outflow of high networth individuals globally, next only to China (net loss of 13,500).
• Compliance Costs: India abolished its wealth tax in 2015 due to litigation and compliance costs.
• Asset Valuation Disputes: Difficulty in valuing assets leads to disputes and legal challenges.
• Harms to Consumption and Employment: A wealth tax could harm consumption and employment by the middle and upper classes.
• Existing High Taxes: The super-rich are already taxed at 42.74% plus a 2% surcharge.
• Indirect Tax Efficiency: Indirect taxes are considered more efficient with low direct tax compliance.

Conclusion

India needs a shift in its fiscal policy that needs such measures that can create employment opportunities. As various countries have introduced the wealth tax, India can introduce a progressive wealth tax along with other fiscal steps to counter the growing inequalities.