less taxable income. There are several possibilities of how the rich might behave when their taxes rise. International evidence suggests that a higher peak tax rate could reduce work effort and business creation; a larger share of the earnings could be taken in forms that are taxed less; and money (and talent) may move offshore to lower tax jurisdictions. All these could lead to large negative economic effects, which may outweigh the positive arithmetic effect.
Fourth, in absence of robust compliance machinery, higher taxes on the rich are unlikely to get translated into higher revenues for the government. With the poor state of tax administration in India, and several routes of tax avoidance and evasion, introduction of a higher top tax rate could actually prove to be counterproductive. Plugging the loopholes in the tax system is a prerequisite to better tax buoyancy and tax compliance. This will, however, require strong political will to reform the domestic compliance machinery, and to rally international cooperation to eliminate tax avoidance opportunities.
The government should focus on implementing the DTC and GST in the upcoming Budget. These comprehensive direct and indirect tax reforms will bring about the required structural changes in the current revenue-generation model of the government. Ad hoc measures, such as higher taxes on the super-rich, can wait.
The author is assistant professor, Indian Institute of Management, Ranchi. Views are personal. He can be reached at email@example.com