GS Paper 3
Syllabus: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment
Source: IE
Direction: The article highlights that instead of excessively taxing the wealthy, the need of the hour is to raise the income of all to reduce income inequalities.
Context:
- Evidence of “excessive” wealth concentration and uneven income growth is mentioned in the recently released Oxfam “Survival of the Richest” report.
- The gap in income recovery between the top income categories and those at the bottom as a result of the economic crisis post-COVID-19 pandemic.
India-specific findings in the report:
- There are now 166 billionaires, up from 106 in 2020.
- The top (30%) earners hold the majority (90%) of the wealth. This contrasts with the global figure, where it is believed that the richest 1% have amassed about two-thirds of all new wealth.
Ramifications of the above findings:
- This can stir the debate for an equalising wealth tax (a progressive wealth tax where the tax rate increases as the wealth of an individual increase. The goal is to redistribute wealth and reduce inequality among citizens.)
- Oxfam argues that indirect taxes are regressive and suggests –
- A wealth tax – a tax on unrealised capital gains and higher taxes on corporates.
- Tax on incomes, capital gains and wealth are interrelated and the changes cannot be recommended in isolation.
Tax collection depends upon The mix of taxes that a country raises as a function of its institutional capacity, the structure of the tax base and the desire for simplification.
Case of India – The report raises two important points:
- The lower corporate tax rate in lieu of incentives and the introduction of GST – a costly experiment of tax policy in India.
- The corporate tax cuts brought the statutory tax rate down from 30 to 25.17%, leading to a revenue loss of Rs 1.03 lakh crore.
- The GST and its disproportionate impact on the lowest earners.
- Oxfam uses NSS 2011-12 to establish that the bottom 50% pays six times more indirect tax as compared to the top 10%.
- The current income tax system exempts incomes up to Rs 5 lakh from tax and the GST rate structure places a higher burden on luxuries.
Issues with the Oxfam report’s calculation:
- Although the report carries the right message about rising inequalities and the need for tax reform, it gets lost in assumptions.
- For example, India will gain 10% more in taxes than it currently collects indirect taxes from the introduction of the wealth tax.
- A wealth tax has historically been utilised by nations, including India, but the revenues were dismal, making it an expensive tax to operate.
- Hence, a compartmentalised approach to tax policy that links several taxes that are levied against the same base is meaningless.
Way ahead: Taxes do not always solve problems, and it is important to consider the impact of other macroeconomic measures like low-interest rates and regulatory actions.
Conclusion: Rather than depending on a tax that depends heavily on volatile asset values, the same goal can be achieved with a gradual increase in wealth and income of all. This will reduce inequalities without penalising the corporates.
InstaCurious:
The Gini index measures the extent to which the distribution of income among individuals or households within an economy deviates from a perfectly equal distribution. A Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality. For India, it was 35.7 in 2019(World Bank Data)
Insta Links:
MaiNS Links:
Q. “Investment in infrastructure is essential for more rapid and inclusive economic growth.” Discuss in light of India’s experience. (UPSC 2021)
