Wealth tax in India will boost economic growth — roadblock is political will

A recent writing ("Piketty’s rights, wrongs") discusses issues related to inequality, demand, and taxation in India, particularly questioning the effectiveness of wealth taxation. While agreeing with the concern over low tax revenue and its impact on social sectors, the editorial argues that wealth taxation could be disruptive and ineffective. However, it is suggested that broadening the tax base through reforms has the potential to generate more revenue.

Taxation and Economic Challenges

• Low Tax-to-GDP Ratio: India's tax-to-GDP ratio is low at 17%, with direct taxes contributing only 7%, far below global standards. This leads to inadequate public spending on essential sectors like education and healthcare, resulting in low productivity, weak demand, and sluggish growth.
• Impact of Black Income on Taxation: The top 1% of earners in India account for 22% of national income, and the top 5% likely earn 40%. If black income generation by the wealthiest could be reduced, more tax revenue could be collected, contributing significantly to GDP. This would help in broadening the tax base and tackling inequality.
• Limited Taxpayer Base: Despite recent reforms, only 6.5% of India's population are taxpayers, and a large portion of these pay negligible tax. This narrow tax base contributes to a skewed income distribution, highlighting the need for better tax collection mechanisms, especially in the service sector.

The Case for Wealth Tax

• Wealth Tax as a Viable Solution: Wealth tax is seen as a viable option for raising revenue because wealth is tangible and often recorded in financial assets and real estate. With digital records and proper political will, taxing wealth can be more efficiently implemented compared to past failures due to loopholes.
• Impact of Wealth Tax on Stock Market Valuations: A wealth tax could reduce inflated asset prices, such as in the stock market, leading to a more realistic return on investments. For example, wealth tax on large corporations like Reliance Industries could lead to lower share prices, prompting capital to shift towards more productive investments, thus boosting growth.
• Challenges and Potential Consequences: While wealth tax is feasible, there are potential challenges such as capital flight, currency depreciation, and balance of payments issues. These concerns would require temporary capital controls. However, the long-term benefits of wealth tax include higher tax collections, which could fund greater investments in public goods and social sectors.

Political Will and the Future of Wealth Tax

• Political Will as a Key Factor: The successful implementation of wealth tax hinges on political will. Despite its feasibility, there are political and economic roadblocks that have historically hindered its introduction. Overcoming these barriers would be critical to ensure wealth tax can be a tool for improving social sector investment and reducing inequality.
• Wealth Tax and Inequality: If structured effectively, wealth tax could contribute to reducing economic inequality, as it would generate more funds for public investment in education, healthcare, and infrastructure. This, in turn, would foster a more productive workforce, leading to sustained economic growth and development.
• Impact on the Black Economy: A well-implemented wealth tax would also reduce the black economy by addressing illegal wealth generation, which would further increase direct tax collections. This could create a virtuous cycle where the tax system becomes more effective, and inequality is addressed over time.

Practice Question

Q. Evaluate the feasibility and potential economic implications of implementing a wealth tax in India. Discuss how it could address issues of inequality, economic growth, and the informal economy.