Taxing the rich more will reduce inequality

The Indian economy is witnessing the growing issue of economic inequality in India and the need for progressive fiscal policies, specifically focusing on the taxation of ultra-high-net-worth individuals (UHNWIs). The discussion emphasizes the necessity of increasing public spending to meet essential social and economic needs while addressing the concentration of wealth among the super-rich. It draws attention to the feasibility of taxing the wealthiest individuals more fairly, pointing to international models and calls for global cooperation in wealth taxation.

Need for Increased Public Spending

• Deficit in Essential Services: Despite strong aggregate income growth, a large portion of India's population continues to lack access to basic necessities such as food, healthcare, education, and housing, underscoring the gap in public spending.
• Climate Change Adaptation: India’s public investments in climate change adaptation and the green transition remain insufficient, leaving vulnerable populations at risk of natural disasters and environmental degradation.
• Inequality and Economic Stagnation: Rising income and asset inequality in India, where the top 10% benefit disproportionately from economic gains, has led to stagnation in mass consumption demand, hindering overall economic growth.

Inefficiency of India’s Tax System

• Low Tax-to-GDP Ratio: India's tax-to-GDP ratio is significantly lower compared to other middle-income countries and G20 nations, limiting the government’s capacity to increase public spending on essential services.
• Regressive Tax Structure: India’s tax system is regressive, with indirect taxes disproportionately affecting the poor and middle classes, while the rich continue to benefit from lower tax burdens.
• Need for Progressive Fiscal Policy: A more progressive fiscal policy, with higher taxation of the super-rich, is crucial to mobilize resources for social welfare and infrastructure development.

Proposal for Taxing the Super-Rich

• Global Calls for Wealth Tax: There is growing international consensus on taxing ultra-high-net-worth individuals (UHNWIs) fairly, as evidenced by the G20 Summit and reports by economists like Gabriel Zucman advocating for a global minimum wealth tax.
• Feasibility of Wealth Tax in India: Contrary to earlier arguments that wealth tax is unfeasible, digitization of financial records and better tracking of real estate assets have made it increasingly possible to implement such taxes effectively in India.
• Addressing Wealth Evasion: Implementing a wealth tax on the super-rich, in combination with global tax cooperation, would help curb tax avoidance by UHNWIs, ensuring they contribute fairly to the country’s economic needs.

Practice Question:

Q. Critically analyze the need for progressive taxation in India, focusing on the potential benefits and challenges of taxing ultra-high-net-worth individuals. Discuss the feasibility of implementing such a tax system in the context of India’s current fiscal and economic conditions.