It’s time to consider a wealth tax that may lessen Indian inequality

The discourse on efficient, effective and equitable public spending often takes us into the realm of limited resources facing competing demands. India definitely needs to widen its revenue collection as well as base. In this context, it is important to discuss the need for levying a wealth tax, and levying it now.

The most compelling reason stems from evidence that there has been massive accumulation of wealth in a few hands. A small section of people has access to a large share of economic assets and resources that remain almost completely untaxed and thus unavailable for public allocation. Wealth, much less than even income, has little to do with one’s education, merit or efforts; it is largely dependent on inheritance and opportunities that come with the advantages associated with belonging to one of India’s privileged classes and castes. India’s top 10% population owns 65% of the country’s wealth, while the bottom 10% owns only 6%, according to the World Inequality Database, 2022. An Oxfam report has highlighted how India’s richest doubled their wealthduring the pandemic. This happened for a variety of reasons, including profits made on vaccines and commodity and asset price movements. But the fact remains that India, despite facing grave financial and economic challenges, has no means to convert any of this growing wealth into productive resources that can generate employment opportunities and push up the incomes of multitudes, which in turn can drive demand for goods—something that is needed to counter an economic drag-down.

One may argue—and it is common to hear this—that wealth is better left to the wealthy, as they know best how to invest. This has not been in sufficient evidence, at least in India. The government lowered the corporate tax rate significantly from 30% to 22% in 2019-20, which has continued despite the economic crises caused by the pandemic. However, this did not elicit much private investment. Obviously, there is something else at work, and one cannot assume that accumulated wealth in private hands will necessarily be invested in the domestic economy.

In addition, it is not only investment that is important, but also where that investment is going and whether it is creating employment opportunities for the youth. Data from diverse sources show high unemployment rates during May-July 2022 for the youth: 28.3% in the 15-24 age group (bit.ly/3IheGYl) and an even higher 43.3% for the 20-24 age-group (bit.ly/3GbjdJi). The likelihood of a global recession and the related layoffs being announced by corporate giants will make the situation worse. The recent economic growth experienced in India, especially in the post-covid recovery phase, has largely been jobless growth and can further deepen both income and wealth inequalities.

No economy can afford to have such youth unemployment rates for long without adversely affecting economic growth and social cohesion. India needs a shift in its fiscal policy, as being argued by a number of economists, to adopt measures that create employment opportunities and in turn drive demand for products made by small and medium level producers. This would also push up growth while not necessarily widening inequalities. Such a shift will call for public investment on two counts. First, measures to revive trust and boost capabilities of small actors across sectors—agriculture, manufacturing and services. Two, essential public services that ensure the enhancement of capabilities among youth, while also creating employment opportunities that can create demand for goods and services from small actors across sectors (i.e., investment in education and health services). One high potential source of revenue to fund such investments is a wealth tax.

Wealth tax, which is a direct tax unlike the goods and services tax or value-added tax, can take several forms, such as property tax, inheritance or gift tax and capital gains tax. Capital Gains tax exists in India, but applies only to transactions and hence is limited in its base. India scrapped its estate duty in 1985 and has no inheritance tax. Although the receipt of gifts is subject to income tax in the beneficiary’s hands, it has various exemptions; it is almost entirely exempt if received from within the family, including the extended family of self and spouse. These exemptions shrink the base significantly, as most accumulated wealth is acquired through family, and that remains outside the gift tax’s ambit. Given the cultural context of wealth inheritance, some exemptions make sense, but upper thresholds can be easily added to make it more effective.

India presently does not have any wealth tax—i.e., a tax levied on one’s entire property in all forms. It did not impose a one-time ‘solidarity tax’ on wealth in post-covid budgets that could have generated resources for essential public investment. A number of Latin American countries, including Argentina, Peru and Bolivia, have either introduced or are introducing a progressive annual wealth tax levied on the wealth gains of each year or a one-time covid ‘solidarity’ tax. There is no reason why India cannot do so too. This is the right time to introduce a progressive wealth tax along with other fiscal steps that can directly reverse the trend of growing inequalities in the country.

Jyotsna Jha is head of Centre for Budget and Policy Studies in Bangalore.