The concept of a wealth tax on the super rich has gained some currency again after a recent Oxfam India report highlighted the widening income gap in the country and recommended such an impost as remedial measure. While it sounds like a noble idea, is it good economics?
A section of experts believes that levying such a tax may not be the best way to bridge economic disparity in the society and instead advocate higher expenditure to distribute benefits to the low-income population. Also, implementation of wealth tax is fraught with practical difficulties, they note.
Sacchidananda Mukherjee, Professor, NIPFP said: “The major purpose of any tax is to mobilise revenue. Inequality and poverty are taken care of through higher expenditure and distribution measures of the government.” He added that a wealth tax also leads to flight of high networth individuals to other more tax-friendly destinations.
Higher income can also lead to more consumption and investments, which in turn can have an indirect impact on creating more employment and boosting economic growth. “More income in the hands of the middle- and higher-income categories will also lead to employment creation and higher consumption, which are both needed for the economy. Rich people are already paying higher taxes though consumption of more services,” Mukherjee said.
Aarti Raote, Partner, Deloitte India also pointed out that the super rich are already paying income tax at the maximum marginal rate of 42.74%. “An additional wealth tax will reduce their investible surplus,” she said, adding that a lot of times, people have their money locked into property, and may not be able to shoulder the burden of a wealth tax if the property is in litigation or not earning any revenue.
India abolished its nominal wealth tax in the Union Budget 2015 and replaced it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs 1 crore. Then finance minister Arun Jaitley had said the tax had a high cost of collection and a low yield and it would lead to simplification of the tax regime. A move to impose another wealth tax on the super rich is unlikely for now although there is a pressing need to widen the tax base. India also does not levy an inheritance tax that could be another way to tax one off gains.
Globally, a number of countries have experimented with a wealth tax but only a few such as Norway, Spain and Switzerland continue to levy it. However, in recent weeks the call for a wealth tax has been gaining ground as the pandemic impacted livelihoods and economic growth has slowed down.
In a recent report, Oxfam India highlighted that the gap between the rich and the poor is widening post the Covid-19 pandemic. It had recommended taxing the wealth of the richest 1% on a permanent basis, with higher rates for millionaires, multi-millionaires and billionaires.
“The wealth tax is likely to be the most direct and powerful tool to restore tax progressivity at the very top of the distribution,” the report said.
In the US, legislators in a few states are reported to be planning to introduce bills to tax billionaires. Meanwhile, in a separate development over 200 billionaires across the US, UK, France and other countries have signed an open letter to political leaders at the World Economic Forum meet in Davos to tax the ultra rich as an investment in common good and a better future.
There remain questions on how a wealth tax will be levied as almost all sources of income are already taxed. Mukherjee pointed out that shares, debentures and financial instruments are already taxed and real estate is also taxed through property and estate taxes. “There is a surcharge on income of high net worth individuals. It is difficult to tax gold as no one would be aware of how much gold is there in a household,” he said.
Raote however, said that over the years, the government has significantly strengthened the information sourcing machinery to collate information through measures like linking of PAN and Aadhaar, mandatory KYC, extensive income tax returns as well as AIR and 26 AS. “The knowledge of the asset base of the tax payer would ensure better tax collection,” she said.
Previously, India’s wealth tax was levied at the rate of 1% on the net wealth of an individual, HUF or company, which was above Rs 30 lakh as on March 31 of every year.
Levying a wealth tax on the rich may not be the best way to bridge economic disparity in the society, believe many economists and tax experts. Further, a wealth tax would also reduce the investible income in the hands of the rich, they said.