India's low tax-to-GDP ratio, despite recent tax reforms, underscores the need for alternative sources of revenue for public goods and services. Discuss the potential role of wealth tax in addressing this issue, the challenges associated with its implementation, and the broader economic impact of such a policy.

Category: Economy (GS -III),

Test Date: 19 Dec 2024

Approach:

Introduction: Briefly introduce India's current tax-to-GDP ratio and the challenges of financing public goods and services.
Potential Role of Wealth Tax:
- broadening the tax base by targeting visible and recorded assets like financial wealth, real estate, and shares
- taxing wealth could address inequality
- raise funds for sectors like education, health, and infrastructure; boost productivity and growth
Challenges in Implementing Wealth Tax:
- historical challenges (complex regulations, loopholes, and political resistance); issue of capital flight, potential depreciation of the currency
Broader Economic Impact:
- could affect asset valuations, shifting investments from speculative assets like stocks to more productive sectors
- this shift could contribute to a more sustainable economic growth trajectory and reduce financial bubbles.
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