The very rich, in his view, do not report much income, but a wealth tax of 2% on billionaires would raise a lot of money to fund India’s rickety social infrastructure. He also urged India to raise its tax revenue as a proportion of GDP.
There is a strong case for setting a target of 25% in the coming decade, for which a mix of wealth tax and more progressive taxation on the super-rich “should be the direction India should go.” India’s chief economic advisor, V. Anantha Nageswaran, who participated in the event, was of the view that such a tax regime would drive capital away.
Globally, contrasting perspectives rooted in ideological differences grew sharp when Milton Friedman, an American advocate of neo-liberalism, contended that “inequality is inevitable and may even be beneficial.” He added, “Social levelling leads to economic stagnation by removing incentives for hard work.”
Arthur Laffer, economic advisor to Ronald Reagan, proposed that a tax cut can increase tax collections if the initial tax rate is above its optimal level. In 1981, Reagan brought down the highest marginal tax rate in the US from 70% to 50%. Years later, Donald Trump reduced corporate tax from 35% to 21% and feted Laffer.
In a recent interaction at the World Knowledge Forum, Nobel laureate Abhijit Banerjee debunked the contention that inequality is necessary for growth and said US growth momentum slowed after its big tax cuts for corporates.
But Piketty must get credit for turning Kuznets’ inverted U-curve hypothesis upside down. Kuznets tried to demonstrate that income inequality first increases and then decreases after reaching a certain level of economic development.
Piketty showed how US inequality has sharply increased since the 1980s. Piketty’s point is that inequality is not an accident of history, but a feature of capitalism that can be reversed through state intervention. Hence his case for more taxation.
Walter Scheidel concurs with Piketty in his book The Great Leveler (2017), which shows how the average tax rate on the top 1% of households came down from 42% to 27% from 1988 to 2013 in America.
World Inequality Report data shows that in India, the share of the population’s bottom half in total income has shrunk from 21% in 1990 to 13% in 2O21, while that of the top 10% has expanded from 32% to 57%. This reflects an embrace of Reaganomics.
India’s tax on the top income bracket came down from 50% in 1980 to 30% in 1997, and then wealth tax was abolished in 2015-16. Finance ministers P. Chidambaram and Arun Jaitley, despite being from opposing ends of the political spectrum, led these tax changes. It is also reflected in the Gini coefficient, which has shown inequality worsening in recent decades.
India’s low taxation policy is also visible in a reduction in the share of corporate tax as a proportion of GDP from 3.9% in 2010-11 to around 3% in recent years. Further, the share of corporate tax in total direct tax collection has come down from 75% in 2010 to around 42% now, and that of personal income tax has risen from 25% to 55% in this period.
This is because the corporate tax rate was reduced from 30% to 25% in 2019. Besides, the potential for tax evasion is higher with corporate tax than with personal income tax, which is often deducted at source.
Jaitley, in his 2017-18 budget speech, gave us a flavour of tax evasion by saying how after demonetization it was noticed only 172,000 returns were filed with earnings of more than ₹50 lakh, while 14.8 million people deposited more than ₹2 lakh in cash during that currency switch.
In The Spirit Level (2009) authors Wilkinson and Pickett bring out the pernicious effect that inequality has on society. It erodes trust, increasing anxiety and illness. They also show how the index of health, measured in terms of drug abuse, obesity, violence and child well-being outcomes, is significantly worse in more unequal countries, whether rich or poor.
The UN’s Sustainable Development Goal No. 10 exhorts all states to reduce inequality and promote universal socioeconomic inclusion, ensure equal opportunity and adapt fiscal and social policies in ways that promote equality. The Indian Constitution’s Article 38(2) also enjoins the state “to reduce income inequality and eliminate inequality in opportunity.”
In Growing Cleavages in India? (2019), a paper by Banerjee, Piketty and Amory Gethin, Indian elections from 1962 to 2014 are studied to reveal how they are fought on “caste and religious lines rather than on tangible material benefits and class-based redistribution.”
Piketty’s recent suggestions reiterate what he has been saying about tax justice in India. As finance minister Nirmala Sitararaman prepares to present her next budget, she could determine whether India should take on further debt to fund our huge infrastructure needs, or use taxation as an instrument to fund social provisions and raise the quality of education, healthcare and technology access for the bottom 50% of Indians.
India’s long neglect of public education for the masses, in particular, needs to end if we are to meet the Constitutional mandate of socio-economic justice and providing everyone an equal opportunity.
The author is professor emeritus, KIIT University, Bhubaneswar
