The Wealth Tax Debate: Addressing Inequality 

Syllabus: GS3/ Economy

Context

• Wealth inequality has become a pressing issue globally and in India, with the top 1% owning 40.1% of the nation’s wealth.
  • This concentration of wealth, juxtaposed against widespread poverty and dependence on state welfare programs, has reignited the debate on imposing wealth taxes to address inequality and generate public revenue.

Historical Background

• Wealth tax is not a new concept. It was introduced in Switzerland (1840), the Netherlands (1892), and Sweden (1911).
• In India, the wealth tax was introduced in 1957 by T.T. Krishnamachari but was abolished in 2015 due to low revenue collection and high administrative costs.
• Globally, the number of OECD countries levying wealth tax dropped from 12 in 1990 to just four in 2017, owing to similar challenges.

What is Wealth Tax?

• A wealth tax is a levy on the net wealth of individuals, typically including assets like real estate, gold, investments, and luxury items, minus liabilities.
• It aims to reduce inequality by redistributing wealth and raising funds for welfare programs.
• Example: Thomas Piketty has proposed a 2% tax on net wealth exceeding ₹10 crore and a 33% inheritance tax for estates over ₹10 crore in India.

Arguments in Favour of Wealth Tax

• Addressing Inequality: Helps redistribute wealth in an economy where the top 1% control a disproportionate share of resources.
• Revenue Generation for Welfare: Funds raised can support public healthcare, education, and social schemes like MGNREGA.
• Progressive Tax System: Targets the ultra-rich, ensuring the tax burden is equitable.
• Moral and Social Responsibility: Promotes fairness by requiring the wealthiest to contribute more to societal development.

Arguments Against Wealth Tax

• Administrative Challenges: Complex valuation of non-liquid assets (e.g., real estate, gold) leads to high costs of collection.
• Low Revenue Generation: In 2013-14, India’s wealth tax contributed only ₹1,008 crore, less than 0.1% of total tax revenues.
• Tax Evasion: The wealthy often find ways to hide or underreport their wealth.
• Capital Flight: High net worth individuals may relocate to tax-friendly countries, as seen in Norway, harming domestic investments.
• Impact on Wealth Creation: Discourages entrepreneurship and investment, critical for India’s growing economy.

Global Examples

• Norway: Raised wealth tax but experienced significant outmigration of millionaires.
• France: Abandoned wealth tax in 2018 due to its negative impact on economic growth and replaced it with a property tax.
• Switzerland: Continues to levy wealth tax but benefits from high transparency, efficient administration, and a stable economic environment.
• United States: Despite calls for a wealth tax, the focus remains on higher capital gains and income taxes for the ultra-rich.

Way Ahead

• Alternatives to Wealth Tax: Reform capital gains, property taxes, and inheritance taxes for better targeting and administration.
  • Increase income tax rates for the ultra-rich to make the system more progressive.
• Improved Compliance Mechanisms: Use technology and data analytics to curb tax evasion and track high-value transactions.
• Focus on Expanding the Tax Base: Encourage more individuals and businesses to enter the formal tax net to distribute the burden.
• Transparent Use of Tax Revenue: Ensure visible improvements in public services like healthcare, education, and infrastructure to build trust among taxpayers.
• Global Coordination: Work towards international agreements to minimize capital flight and tax arbitrage by the wealthy.
• Voluntary Contributions: Encourage philanthropy and voluntary contributions by the wealthy through incentives.

Source: IE