Taxing the Super Rich

Amidst wide anticipations of taxing the ‘super-rich’ of the country, Finance Minister P. Chidambaram said in his budget speech 2013-14 that an additional 10% surcharge would be levied on those whose taxable income is above Rs 1 crore per annum. While maintaining a status quo on the Income Tax slabs, Chidambaram announced his intention to widen the tax base. Chidambaram said, “India’s Tax GDP ratio is one of the lowest in the world.” “We should reclaim 11.9% Tax to GDP ratio in the short term,” he said.  There has been a raging debate in the country in the run-up to the budget on the desirability of a higher tax rate on the rich. While a number of economists and Wipro chairman Azim Premji have supported taxing the rich at a higher rate, there are some who have termed the move as counterproductive.

The Government should a

ddress the lack of progressive structure in the country’s tax system and raise the much needed additional resources for financing education, health care, and food security. Direct taxes can be increased by taxing the rich more, increasing the share of property tax and re-introducing of inheritance tax. Overall the tax effort is very low. We need to raise it from 15 percent to at least 20 percent. Other countries rely more on direct taxation, which raises greater revenues from those who can afford to pay more and therefore have a more progressive structure of taxation than India. India raises only 15.5 percent of GDP as tax revenues- the lowest taxes of all G20 nations, while the average tax-GDP ratio in OECD countries is at 24.6 percent. India should mobilise tax revenue and rely more on direct taxes instead of indirect taxes, which are regressive because it affects the rich and poor alike. As per estimates, revenue potential of inheritance tax and wealth tax in India has been found to be about Rs. 63,539 crore per annum or 0.8 percent of GDP of 2011-12, roughly equivalent to current expenditure of about 0.9 percent of GDP on health care. With the introduction of property taxes, which would largely fall on wealthy, India could double public expenditures on health care. Citing loopholes in international taxation, double taxation agreement should be relooked. The government should increase direct taxes mainly wealth and inheritance taxes, eliminate corporate exemptions and close loopholes on tax avoidance. India could easily raise up to 20-25 percent of GDP as tax revenues, which is the amount that would be necessary to fund modern welfare state that can deliver on its objectives of faster, inclusive and more sustainable development.

One of the most pernicious economic falsehoods one hears that there is a necessary tradeoff between fairness and growth. By this view, if we raise taxes on the wealthy the economy can’t grow as fast. Taxes were far higher on top incomes in the three decades after World War II than they’ve been since. And the distribution of income was far more equal. Yet the American economy grew faster in those years than it’s grown since tax rates were slashed in 1981. This wasn’t a post-war aberration. Bill Clinton raised taxes on the wealthy in the 1990s, and the economy produced faster job growth and higher wages than it did after George W. Bush slashed taxes on the rich in his first term. Higher taxes on the wealthy can finance more investments in infrastructure and education, which are vital for growth and the economic prospects of the middle class. Higher taxes on the wealthy also allow for lower taxes on the middle potentially restoring enough middle class purchasing power to keep the economy going. As we’ve seen in recent years, when disposable income is concentrated at the top, the middle class doesn’t have enough money to boost the economy. What we should have learned over the last half century is that growth doesn’t trickle down from the top. It percolates upward from working people who are adequately educated, sufficiently rewarded, and who feel they have a fair chance to make it in the country. Fairness isn’t incompatible with growth. It’s necessary for it.

By: Dr. Asmi Raza