Why taxing super-rich is an outmoded plan

INEQUALITY in this country is a highly visible phenomenon. In urban areas, luxury cars drive past the homeless, who live in shanties right next to shiny malls and high-rise condominiums. Even rural areas are divided into areas of privilege and scarcity. And the contrast between urbanised areas and rural hamlets is startling. There is equally a sharp divide between states in the north and those in the south. The western region, with the highly industrialised states of Maharashtra and Gujarat, is in a different league from West Bengal in the east, highlighting the regional imbalances in development.

This does not take into account the rise of the youthful information technology industry in Bengaluru and Hyderabad, that has sparked the creation of what is now known as India's Silicon Valley. Even these cities have seen clashes stemming from inequality, as affluent IT professionals from around the globe are resented by local residents, who seek refuge in promoting regional identities through language and culture.

Having said this, the reality is that the country is changing rapidly in multiple ways owing to the economic growth having trickled down to the masses, albeit in an uneven manner.

So, when eminent French economist Thomas Piketty speaks of growing inequality in India, he is merely describing what we all know about this emerging economy. As co-director of the Paris-based World Inequality Lab, he has earlier also presented data showing that India is one of the most unequal countries in the world.

His solution is that higher taxes must be levied on the super-rich. This is meant to garner resources needed to provide adequate public services for the entire population.

The focus on taxing billionaires comes at a time when there has been a rapid proliferation of the super-wealthy. The latest UBS Billionaires Ambitions Report puts India third in the global list of billionaires, though it is far behind the US and China in terms of numbers. Family-owned businesses are said to comprise many on the list, but the emergence of the new-tech czars is another factor for the spurt in those at the top of the heap.

Piketty's argument is that the imposition of a wealth tax on assets over Rs 10 crore and an inheritance tax of 33 per cent on property over this threshold will enable the exchequer to raise enough resources to improve public services like education and healthcare. He also points to the fact that China similarly imposed such a tax and it created greater equality in terms of the distribution of public goods.

A significant flaw in this thesis is that it puts the spotlight on raising resources as a magic bullet to resolve the issue of poverty and inequality. The reality is that even with sufficient resources, it is not always possible to achieve the goals of sustainable development.

It has been apathy rather than shortage of funds that has led to the neglect of public educational institutions ever since Independence. The state-run school system has been avoided by both the bureaucracy and political leadership for the education of their own children. In fact, the civil services even established a separate private school for their own offspring, highlighting the indifference towards building infrastructure and improving the teaching content of the state-run institutions.

This is not the only infirmity in the proposal. Those who have become billionaires over the past decade are also wealth creators in terms of having made substantial investments in a growing economy. These entrepreneurs have made the best use of the deepening reforms, which have created an enabling environment in both the manufacturing and services sectors.

In a globalised world, corporate leaders can easily shift capital to numerous international tax havens. Capital outflows could be an unwelcome result of raising taxes, which are already at the level of 43 per cent for the topmost income strata.

The previous wealth tax was done away with in 2015 on the grounds that there were more administrative costs in implementing the levy than the actual revenue inflow.

The concept of taxing the rich and paying the poor was appealing at the time of Independence, when the majority of the populace was under the poverty line. A wealth tax was, thus, introduced in 1957. It did little to ameliorate the lot of the weakest sections of society.

The abolition of the tax was part of the sweeping changes to simplify tax laws and procedures, in tune with the altered economic reality.

The fact is that liberalised economic policies have brought millions of people out of the grip of poverty in recent decades. A large aspirational middle class now exists and it would view any inheritance tax with dismay.

It is also an anomaly to compare equality in the contemporary era with that of the British Raj, as has been done in one study by the World Inequality Lab. During the colonial times, there was less inequality simply because there was only a small segment of the population that could be considered affluent. The fruits of economic development have now filtered down to the masses due to new innovative policies, many of which are anchored in technology.

The direct benefits transfer schemes, for instance, have ensured that the weaker sections of society are able to gain from schemes meant for their uplift. It is also technology that has enabled millions to open bank accounts and access them through a simple touch on their mobile phones. Financial inclusion has become a reality for even the poorest of the poor.

Piketty's tax proposals, thus, seem outdated for an India that has emerged into the digital era. Instead, the economy needs to utilise the technological skills available in the country to uplift the public services in the country.

A beginning has been made to create the digital infrastructure that will upgrade the quality of life, especially for those at the bottom of the pyramid.

A benign environment is needed to ensure that both domestic and foreign investors are able to push through the regulatory cholesterol and set up more manufacturing projects. This, in turn, will provide the jobs urgently needed in the coming years to enable the shift in labour from agriculture to industry.

These are among the important tasks before the country as it seeks to move on to a path of sustained growth and development. Taxing the super-rich is not one of them.