By Bhaskar Dutta
One of the more unpalatable facts associated with the pandemic is the huge increase in global inequalities in the last couple of years. In a recent report, Oxfam mentions that the total wealth of billionaires increased by roughly 60% during March 2020 to November 2021. This was a bigger increase than in the previous 14 years combined. At the other end of the spectrum, the World Bank estimates that 97 million people worldwide fell into extreme poverty in 2020 and are now living on less than $2 a day. The number of the world’s poorest also rose for the first time in over 20 years. Of course, the same pattern has been repeated in India.
A common government response to the pandemic in many countries was to loosen the purse strings. Central banks injected enormous amounts of liquidity into financial markets. This additional liquidity has helped keep asset prices high. Stock markets have boomed all over the world although the economies that underpin them went into deep depression. These monetary policy interventions were well-intentioned, and they are likely to have helped prevent some bankruptcies and preserve jobs. Perhaps the more significant impact is that they have inflated the value of assets held primarily by rich people and have a lot to do with the growth of billionaire incomes.
Not surprisingly, this has resulted in widespread demands both in India and abroad that taxes on the super-rich need to be stepped up significantly in order to finance both general economic recovery as well as provide succour to those particularly hard hit by the pandemic. At first sight, this seems a no-brainer, particularly because the actual taxes paid by the super-rich are a minuscule fraction of their wealth. The striking unfairness of this situation prompted even a group of more than 100 billionaires and millionaires, the so-called “Patriotic Billionaires”, to issue a plea at the recent World Economic Forum— “make us pay more tax”.
Given the compelling ethical reasons for a steep hike in taxes on the super-rich, what has prevented its widespread implementation? One could, for instance, think of introducing a highly progressive income tax so that, say, the top 1% of income earners pay punitive taxes. Consider, for instance, the situation in India. The highest income tax rate is only 30%, and those with taxable incomes above Rs 5 crore pay an additional surcharge of 37% on income tax. This translates to an overall average tax of roughly 40%. However, even if the highest marginal tax rate was raised to 60% or 70%, this would still capture only an iota of the windfall pandemic-time gains made by India’s billionaires. This is because income tax is levied only on realised capital gains. So, to the extent that much of the wealth of billionaires is in the form of financial assets which have not been traded, increases in their values do not constitute taxable incomes and so escape the tax net.
This leaves open the possibility of a tax levied directly on wealth. A wealth tax is associated with a different set of problems. What should be the base on which it is sought to be levied? If wealth is computed on the basis of the cost of acquisition of various assets in the possession of any individual, then actual wealth will be underestimated since unrealised capital gains will again not be taken into account. The other possibility is that wealth is computed on some notion of current “market” value. Most financial assets can then be priced quite accurately. However, the market for real estate is not really very active. Properties are also not homogeneous entities—even two neighbouring buildings may differ widely in value. So, estimates of wealth held in real estate will be highly subjective. There is also the apprehension that any attempt to introduce wealth tax in any individual country will induce flight of capital across international borders. Indeed, some estimates put the amount of capital flight from France soon after it imposed a wealth tax at several times the amount of revenue raised from the wealth tax.
Perhaps, the only solution is to include unrealised capital gains in taxable income. If the purpose is to tax large windfall gains—such as the ones reaped by the ultra-rich during the pandemic, then the size of the gain attracting this “windfall gains tax” can be kept quite large. Since property prices do not fluctuate as much as financial assets, this would leave real estate outside the ambit of such a tax as well as the unrealised capital gains of an overwhelming majority of retail investors. So, tax administrators would only have to focus on a small number of taxpayers. Since windfall gains occur only infrequently, the danger of capital flight may not be as large as in the case of a wealth tax. After all, the transfer of large amounts of capital has some long-term adverse effects—for instance, in the form of affecting the size of business operations in the country of origin. This long-term adverse effect may be larger than the infrequent benefits reaped through saving the windfall gains tax, and hence reduce the outflow of capital.
The writer is Professor at Ashoka University.