5 min read.Updated: 29 Jun 2016, 09:31 AM ISTHimanshu
Subsidies to the rich are hurting the capacity of the government to spend more on essential sectors such as health, nutrition and education
Last month, the government released much sought-after tax data. The data fell short in that a break-up of taxes by income categories was only available for 2012-13, but it did confirm apprehensions on two counts: first, India remains a low-tax country despite the acceleration of economic growth in the past decade, and second, income inequality has risen in the past two decades.
One of the reasons the tax data had been sought after was for an understanding of the trends in income distribution. The time series data on tax returns, which was published by the government until 1999-2000, was stopped and since then, researchers such as Thomas Piketty have been demanding a break-up of tax data by income classes. While releasing the data, the government provided this only for one financial year with no data for the intervening years. But even with this limited data, the results confirm what had been known from other sources of data. These are presented in this year’s economic survey.
According to the economic survey, the share of the top 1% of the population in the country in the total national income was around 10% in the 1950s, but came down to less than 4% by the end of the 1970s before steadily climbing to 7% by the end of the 1990s. By the latest estimates, this went up to 13% for 2012, the highest since independence, but also, importantly, it almost doubled in the past 15 years. The same is true for the share of the top 0.1% of the population, whose share was 5.1% in 2012, up from an average of 2.5% in the latter part of the 1990s.
Clearly, the increase in inequality has been one of the highest since independence and is much more than in any other country with a comparable per capita income or among developed economies. Most of these conclusions had been expected; the data only confirmed what was already known from other sources.
For example, while the National Sample Survey consumption surveys have consistently shown an increase in consumption inequality, the income surveys of the India Human Development Surveys have also shown an increase in income inequality.
However, the real issue is not just the fact that the richest of the country have been allowed to amass considerable wealth, but the inability of the state to tax the rich more.
The economic survey has a full chapter on this and while it may say that India is not an outlier as far as tax collection is concerned, the evidence from other studies and data sources as well as from the economic surveys do point to the fact that the government has not only allowed the super-rich to amass massive wealth but also has contributed to a worsening fiscal situation by increasing exemptions, subsidizing the wealthy and through various tax giveaways. Not only is India the country with the lowest tax-to-GDP ratio among countries with a similar per capita income on a purchasing power parity basis, but is also the country with the lowest expenditure-to-GDP ratio.
Clearly, the subsidies to the rich are not only bad on the equity principle, but are also hurting the capacity of the government to spend more on essential sectors such as health and nutrition and education. Not only has our expenditure on a per capita basis on these sectors been among the lowest, it has also remained stagnant for the past two decades.
During the period when the economy expanded at a rate of more than 8% per annum, our tax-to-GDP ratio remained almost stagnant. The current tax-to-GDP ratio of around 16.8% is roughly the same as it was at the beginning of economic reforms in 1991. The primary reason for the low tax collection has been the low tax base, as admitted by the finance ministry in the economic survey. The Indians who pay tax account for only 2% of the population. This is not only low compared to the ratio of voters in an economy but also low compared to the quantum of high-value transactions.
But a far bigger issue is the dominant thinking of the governments in the past 25 years that lowering the tax rates will lead to better compliance and better tax collections. None of these have been found to be true, although it has led to a situation where the effective tax rates on corporate entities and the rich are among the lowest, while the wage-earners pay an effectively higher rate of tax, contrary to the principle of progressive taxation.
Interestingly, those who keep arguing that a high tax rate is not only impractical, but is not the right policy would do well to look at the historical marginal tax rate data of developed countries. Most of post-war Europe and other developed countries had an effective tax rate higher than 60% during the time their economies were being built after the war. On the other hand, we have continued to lower our tax rates not just on personal income but also on corporate entities, with the finance minister announcing a reduction in the corporate tax rates to 25% from the existing 30% by 2019.
It is not just tax rates and exemptions that have benefited the rich; the economic survey also points out that the total amount of subsidy enjoyed by the rich was more than ₹ 1 trillion in 2015-16. There are other examples of the kind of patronage that the government provides to the rich, not including the subsidized credit and loan write-offs that have led to the virtual collapse of the banking sector and an increase in non-performing assets.
At the same time, expenditure on essential public services such as agriculture, nutrition (Integrated Child Development Services, mid-day meals), education and health has been substantially cut.
The approach of the government in the past two years, when many parts of the country battled a drought, was not just a reflection of the vulnerability of the poor and rural areas to the vagaries of the monsoon, but also the callousness of the government, which was more bothered about protecting the rich rather than providing basic services to the citizens of the country.
Himanshu is an associate professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.