Home >Politics >Policy >Progressive taxation will help bring down income inequality

The Union budget for FY20 has set forth the government’s vision for the next five years, with a focus on investment. The goal of making India a $5 trillion economy is a realistic one. We look forward to seeing the specific economic strategies that are being worked out by the government to attain the targets. On rationalization of taxation, the priority, rightly, has been accorded to extending the lower 25% corporate tax rate to all companies with annual sales up to 400 crore that the finance minister said would cover 99.3% of companies in the country. Making corporate tax rate more competitive has to be a top agenda as it will make India more attractive as a destination for doing business. I hope this can be reduced further and extended to all firms.

For a country like ours, having progressive personal income tax rates is very natural. Progressive taxation has a direct impact on reducing income inequality. Our taxation rates, however, must be based on our own realities. This means that we need empirical evidence of the relationship between progressivity of personal income tax with tax evasion, investment and economic growth within India. Is there evidence to suggest that an increase in the marginal tax rates for certain brackets will impact compliance or investment decisions? The government’s overall focus on rationalizing corporate tax rate, however, is the need of the hour. Taxation is one of the tools of revenue mobilization. This, however, must be complemented by strategic disinvestment.

In India, the first order concern remains that of reducing poverty. We have done a tremendous job of reducing poverty over the last 25 years. But we still have a large number of people in absolute poverty as well as people just above the poverty line who remain vulnerable to income shocks. The focus on growth as a paramount policy priority in this budget, therefore, is very welcome. Improving subsidy delivery and schemes for financial inclusion, health and housing are very effective ways of addressing income inequality. Taxation is just one of the several instruments of addressing income inequality. Improving access to financial instruments, healthcare, electricity and cooking gas and investing in rural infrastructure for basic amenities are important redistribution policies of the government. From that perspective, I do not think India needs to have any fear of inequality worsening seen in OECD countries. Schemes such as the one to provide clean drinking water may have an upfront cost, but these are not just welfare schemes, they will enhance long-term productivity of the nation.

In a dynamic economy, some sectors may need to be incentivised. Tax breaks given to specific sunrise industries are part of such policy. But it must come with an expiry date. Businesses must know that this is for a specified number of years and the government should have well planned exit strategy from such policies. The same approach holds good for schemes like the rural employment guarantee scheme which has had an enormous impact on poverty reduction in rural India.

The Union budget has set the goal of a $5 trillion economy. Now we need to figure out the micro strategies at the level of individual states and specific sectors of the economy. Like, what would it take to double our apparel exports or to triple the inflow of foreign tourists? At a more fundamental level, we need to have a deeper understanding on why savings in the economy is declining, which is a serious concern. I think we need to set up an expert committee to ascertain this. Some of these are expected to be part of the 100-day programme of the government.

Shamika Ravi is director (research) at Brookings India and member of the Economic Advisory Council to the Prime Minister.

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