Wealth Inequality and the Debate on Wealth Tax

As per a report of the World Inequality Lab (Income And Wealth Inequality In India, 1922 -2023), inequality has risen worldwide, especially after COVID-19.

Rising Economic Inequality

Rising Inequality Worldwide:

• • Top 1% Dominance: The top 1% accounted for more than two-thirds of wealth generation since 2020.
  • Bottom 50% Marginalised: The bottom 50% own only 2% of the world’s wealth.

  Concerning Condition in India:

  • Economic Inequality in India is worse than the colonial period , with the top 1% owning 40% of India’s wealth and taking away 22.6% of national income every year.
    • India’s Inequality is one of the highest in the world.

    Rousseau on Economic Inequality:

    • Rousseau argued that economic inequality stems from the institution of private property and the resulting accumulation of wealth by a minority, leading to a disparity in power and freedom.
      • “Eat the Rich” is commonly attributed to Rousseau, a renowned political philosopher and leading figure in the French Revolution: “When the people shall have nothing more to eat, they will eat the rich.”

      The Case for a Wealth Tax

      • Failures of Current System: The present taxation system is failing to redistribute wealth. Super rich avoid income tax through low salaries and wealth in shares/property. The Kuznets curve theory (inequality rises then falls with development) has failed.
      • Potential Benefits: A 2% wealth tax on the super-rich could fund health, education, and reduce inequality.

      What is Wealth Tax?

      • A Kind of Direct Tax: A direct tax on individual assets such as cash, shares and property.
      • India’s Wealth Tax Act: India’s Wealth Tax Act 1957 imposed a 1% tax on earnings over Rs 30 lakh/year. The Act was introduced in 1957 but repealed in 2015 due to improper implementation.
      • Global Presence: Wealth tax still exists in some countries like Switzerland, Norway and Spain.
        • G20 finance ministers are also discussing a global minimum tax on billionaires.
        • They also called for a strengthened global minimum tax on multinational companies, which could raise an additional $250 billion per year.

        Arguments in Favour of Wealth Tax

        • Reduces Wealth Gap: A wealth tax reduces the wealth gap and creates a fairer society.
        • Contribution to Society: The rich should pay more for benefiting from society’s resources.
        • Funds Public Goods: Wealth tax revenue can fund public goods and services.
        • Encourages Investment: A wealth tax encourages productive investment over hoarding.

        Arguments Against Wealth Tax

        • Flight of High Net Worth Individuals: A wealth tax could lead to the flight of high-net- worth individuals from the country.
          • As per the Henley Private Wealth Migration Report of 2023, India is the country with the second-highest outflow of high networth individuals globally, next only to China (net loss of 13,500).

          Conclusion

          India needs a shift in its fiscal policy that needs such measures that can create employment opportunities. As various countries have introduced the wealth tax, India can introduce a progressive wealth tax along with other fiscal steps to counter the growing inequalities.

          In the context of any country, which one of the following would be considered as part of its social capital?

          (a) The proportion of literates in the population

          (b) The stock of its buildings, other infrastructure and machines

          (c) The size of population in the working are group

          (d) The level of mutual trust and harmony in the society

          Mains Question: Evaluate the pros and cons of reintroducing a wealth tax in India as a tool for economic equity and fiscal policy. Give some suggestions for reforming India’s tax system to better address wealth inequality. (15 Marks, 250 Words)

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