Jumlas, or false promises, have become an integral part of electioneering in India to sway public sentiment. In the last three days, wealth redistribution has become a hot electoral issue. It’s being said that the ‘big bad State’ will snatch the properties from everyone and, in Robin Hood style, be distributed to outsiders.
There is a need for a dispassionate analysis of why redistribution is required in India.
Whose wealth and how much is it?
According to detailed income tax data, 6.6% of the population filed a tax return in 2020-21. But only 0.68% of the population were effective taxpayers who paid a significant amount of income tax. The rich, who declare an income of above Rs 1 crore, were 0.016% of the population, and they declared 38.6% of the total taxable income.
Higher the income, more the savings and accumulation of wealth. So, a bulk of the wealth of the country is with this 0.016% population, and the next highest wealth holders will be the 0.68% people.
So, if there is to be any wealth redistribution, it would be from the 0.016% of people to the bottom 90% who are near the poverty line.
Data on the eShram portal, which has 300 million unorganised sector workers registered, suggests that 90% of them earn less than Rs 10,000 per month.
So, those against any redistribution are protecting the 0.16% or 0.68% of the people and are against the bottom 90% in the country.
The disparity is much worse than depicted above because the top 1% in the country has substantial black incomes and undeclared wealth in India and abroad (illegally spirited out).
Also read: Poor Country With Affluent Elite, India Is Going Nowhere
Credit Suisse data for 2018, before the COVID-19 pandemic, shows that inequality in India is one of the highest in the world. It shows that the top 1% own 51.5% of the wealth. In contrast, the bottom 60% own 4.7% of the wealth. This becomes more skewed if the black wealth of the top 1% is taken into account.
More importantly, Credit Suisse, no left-leaning organisation, suggests that inequality is the result of the economic and political system in a country. It is not preordained by nature. If India also adopts more egalitarian policies, as in some other countries, inequality can be less.
Need a change in system
It is often argued that the rich have become rich because of their hard work and no one should appropriate their wealth. But the poor workers and farmers can be seen toiling even harder in extreme conditions. So, it is not an issue of hard work versus lazy people. Who gets how much is a result of the system, education, opportunities, and so on. Many of the rich people have become rich through cronyism, cutting corners, and bending rules.
Finally, it is not argued that wealth be appropriated by the government and given to the poor. That happens only during a revolution when society breaks down. Taxation can create a more level-playing ground.
Social justice demands a level-playing field for all in society. That requires high-quality education and health for all and a generation of productive employment for all. With poor quality education (as revealed by ASER reports) what chance does a poor person have to move up the ladder or become an entrepreneur? Without employment how does one generate an income to acquire wealth?
For employment generation, education, and health infrastructure, resources are required. These can be obtained via direct taxation of income and wealth.
Also read: Ever Wondered About Your Value to the Government? Take a Look at Your Tax Contributions
Principles of taxation
Direct taxes are based on the ‘ability to pay’. Those with a higher income should pay not only more tax but a proportionately higher tax. That is the tax rate should rise. The Haig-Simons definition of income can be used for taxation. So, for equity, those with more wealth but the same income should pay a higher rate of tax. This brings in the idea of a wealth tax. Along with that, there is a need for a gift tax. In India, we eliminated wealth taxation by giving so many exemptions that it collected little.
India had an Estate Duty, which was also eliminated for reasons similar to why the wealth tax was eliminated. Elsewhere it is called Inheritance tax. This tax reduces inter-generational inequities which are considered socially desirable.
Growing inequality leads to economic, social, and political problems. The economy slows down due to inadequate purchasing power of the poor. India needs faster growth to create jobs. Growing disparities cause social discontent. Every society has its own norms of how much inequality it is willing to accept. In India, discontent is growing among workers, farmers, youth, and women. Finally, inequality also translates to greater political influence and marginalisation of the poor. This is visible in India with the rise of money power in elections and growing corruption which undermines democracy, economy, and society.
A more equitable growth will also mean more profits and higher investment so that capital instead of flying out of the country will flood in. Increased direct taxes will not be a disincentive to investment if the economy is growing. This is recognised the world over.
Global stance on inequality
US President Joe Biden in March 2023 said, “It is about time that the super wealthy start paying their fair share.”
He elaborated that 55 of the biggest corporations pay zero federal tax on their $40 billion of profits. Billionaires pay an average of 8% of federal tax, which is less than what teachers and firefighters pay.
Biden, no dyed in the wool leftist, is a leader of the capitalist world. The super-rich globally have also been saying that if capitalism is to survive, the rich have to pay more taxes.
In 2011, Warren Buffet, then the third richest man in the world, had said, “[The] mega-rich get extraordinary tax breaks” so he paid 17.4% of his income as tax which is a lower proportion than his secretary. ProPublica in 2021 revealed that the super-rich, the top 0.001% of the taxpayers, paid little or no tax. Buffet is supported by many American, German, French and the Italian rich. In 2019 and 2022, this plea was again repeated.
India is an example of extreme inequality in the world, which is a result of the prevailing economic and political system. Considering the points mentioned above, the economic system needs to change and there needs to be greater equity in taxation, which would be highly beneficial to the country.
Arun Kumar is a retired professor of JNU. He authored Indian Economy’s Greatest Crisis: Impact of the Coronavirus and the Road Ahead (2020).
