One of the most extraordinary developments in recent weeks is the demand for higher taxes from rich Westerners.
Earlier this month, 16 business leaders and wealthy individuals in France signed a petition asking the French government to increase tax rates on people like them. One of the many suggestions was an exceptional tax equal to 3% of their income that would be imposed till the budget deficit in their country was reduced to 3% of the gross domestic product. “At a time when the public finances deficit and the prospect of a worsening state debt threaten the future of France and Europe, and when the government is asking everyone to show their solidarity, it seems necessary for us to contribute to this,” they wrote.
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Earlier, billionaire investor Warren Buffett had argued in an op-ed published in The New York Times that it is time the US government took away more from the super rich. “My friends and I have been coddled long enough by a billionaire-friendly Congress. It’s time for our government to get serious about shared sacrifice,” Buffett argued. “While the poor and middle class fight for us in Afghanistan, and while most Americans struggle to make ends meet, we mega-rich continue to get our extraordinary tax breaks,” he wrote.
Buffett and the French petitioners have used terms such as solidarity and shared sacrifice that are usually part of the lexicon of the Left. Whether their call is a truly enlightened move or a cynical ploy to defend them against public ire at a time of great economic distress is unclear to me. But the calls have come from business people who have built their wealth in activities that have not faced popular anger. In short, they are not bankers or hedge fund managers.
Either way, it is worth speculating whether the great tide of tax cuts that swept over the globe over the past 25 years is about to recede. Most Western economies face a fiscal crisis, and have to maintain the complex balance between spending more right now to reignite growth and put in place policies that will help them put public finances in order in the future. The current austerity debates are focused on spending cuts. How soon before higher taxes are put on the table for consideration?
In India, the marginal tax rate—or the tax paid on the last rupee earned by an individual—had climbed to a ridiculous 97.5% during the high noon of Indira Gandhi’s tryst with socialism. Tax rates of income and wealth have fallen dramatically since then, creating stronger incentives for people to work harder and also declare their income. The tax code has also been cleaned up, with fewer tax slabs, exemptions and distortions. The new Direct Tax Code—especially the original version proposed by the finance ministry during the tenure of P. Chidambaram— will take this process of tax reform forward.
Lower taxes and a more transparent tax code are definitely a positive for the Indian economy at its current stage of development. But there are signs that income inequality has beengrowing in India, though more gradually than many critics of globalization allege. My personal view is that some increase in inequality is inevitable in an era of high growth—an empirical reality first noticed by US economist Simon Kuznets many years ago—and is not a significant problem as long as the channels of opportunity and social mobility are robust.
The more significant political issue is the rise of a new class of super rich at the very top of the pyramid, whose wealth has multiplied because of the boom in equity prices since 1991. India currently has short-term capital gains taxes on shares that are lower than income taxes, does not tax long-term capital gains and has no inheritance tax. Most tax experts I spoke to say that these are valid incentives for the creation of wealth.
However, I recently met one of the finest Indian economists in the new generation. I shall not name him since we had an informal chat. He argues that it is regressive that the middle class should pay relatively higher income taxes and earn negative real returns on their preferred mode of savings, the bank deposit. (Of course, the middle class has its little tax subsidy, through the statutory and public provident funds that pay tax-free interest rates that are higher than those available in the market or with banks.)
The Indian business class has no need to be apologetic about the wealth it has created and the jobs it has generated. But signs of growing concentration of income and wealth among our home-grown billionaires could eventually lead to a political backlash, especially if more corruption scandals come to light. The more enlightened parts of the business community may have to follow the steps of Buffet and the French plutocrats, and reach out to the rest of society in a gesture of goodwill.
Niranjan Rajadhyaksha is executive editor of Mint. Comments are welcome at firstname.lastname@example.org