GS 3, Indian Economy, TLP-UPSC Mains Answer Writing
2. Will it make sense to put an additional tax burden on the super-rich to mobilise revenue at the time of COVID-19 pandemic? Substantiate your views.
क्या COVID-19 महामारी के समय राजस्व जुटाने के लिए अत्यंत धनि लोगों पर अतिरिक्त कर का बोझ डालना समझदारी होगी? अपने विचारों को सारगर्भित करें।
Demand of the question:
It expects students to write about viability of the demand of additional tax burden on the super-rich to mobilise revenue at the time of COVID-19 pandemic with substantive argument.
Introduction:
IRS association paper, Mission Jai Hind in India proposed by economists and activists suggested ideas of raising tax burden on super-rich to fight the impacts of COVID-19. There have been demands of additional tax on super rich to deal with unprecedented fall of revenue of government inspired from Peru’s proposed ‘solidarity tax’ to mitigate the economic impact of the COVID-19 pandemic.
Body:
In late-March, the government announced an economic package of $22 billion (amounting to 0.8% of GDP). In second week of May, a second economic package was announced, which amounts to nearly 10% of India’s GDP. It includes the first economic package and a slew of credit guarantees and liquidity enhancing measures that hardly qualify as fiscal stimulus.
Case for solidarity tax on super-rich:
- India desperately needs solidarity and wealth taxes to boost direct tax revenues that would decline drastically this year due to lockdown and social distancing measures implemented in response to COVID-19.
- Need of fiscal stimulus: Given the magnitude of humanitarian and economic disaster in India, the government should not worry about fiscal deficit numbers. This is the right time to abandon fiscal fundamentalism as India badly needs a strong fiscal stimulus to mitigate COVID-19 shocks which need additional revenue.
- There is no denying that India has the potential of greater domestic resource mobilisation by imposing wealth, inheritance, and estate taxes, in addition to raising the income tax slab for the super-rich.
- Quantity of ultra super-rich: While India is still home to 180 million poor people, the country has the world’s fastest-growing population of millionaires. According to a report by Credit Suisse Research Institute, there are 7,59,000 dollar millionaires in India. According to Hurun Global Rich List 2020, India occupies the third position globally (after China and the US) with 137 dollar billionaires.
- In 2016, government abolished the wealth tax introduced way back in 1957. The wealth tax was replaced with an extra 2 percent surcharge on the super-rich individuals with a taxable income of over Rs 10 million. In the 2019-20 Union Budget, the Finance Minister proposed enhancing the super-rich’s surcharge but soon withdrew it. Last year, the government slashed the maximum corporate tax rate from 30 percent to 22 percent. The revenue foregone on reduction in corporate tax would be Rs 1.45 trillion annually, not an insignificant amount.
- Despite experiencing higher growth rates over the past two decades, India’s tax-GDP ratio is abysmally low primarily due to low direct tax base, parallel economy, and unorganised sectors of the economy. India’s tax-GDP ratio (excluding states’ share in taxes) was 10.9 percent in 2019, far lower than the average OECD ratio of 34 percent. According to official statistics, only 14.6 million individuals (less than 2 percent of the population) paid income tax in India last year. On the other hand, indirect taxes (such as excise taxes) impose a greater burden on poor people, thereby aggravating the already high degree of inequality in India. In recent years, there have been frequent demands to reform India’s regressive tax system and to make it more equitable.
- A policy paper quickly withdrawn due to huge criticism; ‘Fiscal Options and Response to Covid-19 Epidemic’, submitted to the Central Board of Direct Taxes (CBTD), recommendations include enhancing the income tax rate to 40% for those earning over Rs 10 million; re-introduction of wealth tax for those with a net wealth of Rs 50 million; a one-time COVID-19 cess of 4% on taxable income of over Rs 1 million; and increasing the surcharge on foreign companies operating in India.
However, Prime minister in his one of the Independence Day speech highlighted the importance of wealth creators and honour to wealth creators; he stressed point of wealth creation as necessity for wealth distribution.
- Targeting: Typically only a small number of individuals often salaried bear the additional tax and/or cess, while another sizeable segment of the super-rich is believed to unfairly evade such tax burdens.
- Tax harassment rather tax terrorism: Repeatedly imposing new cess/surcharge on a small group of captive tax-payers is not only unfair to them and acts as an disincentive, but also goes against the principle of lowering the tax rate along with broadening the tax net adopted since the economic liberalisation in 1991 (when the highest income tax rate including surcharge used to be as high as 56%).
- Fewer rich people: high marginal rates of taxation on income and wealth would produce adverse incentives to work which would reduce the overall size and growth of the national pie.
- Against fundamental economic principles: Laffer Curve’ suggests that, as tax rates go up, initially tax revenue increases but eventually at some ‘very high’ rates of tax, tax collection begins to fall. For instance, 97% rate (the top tax rate, including surcharges, in Indira Gandhi’ s Budget of 1970-71) is generally regarded as ‘too high’ as tax payers in that bracket would either prefer not to earn extra income or make all kinds of efforts to evade paying taxes, including sending capital abroad or migrating to countries with lower taxes.
- Era of digital economy and tax heaven countries: In today’s scenario technology allows capital and income to fly from one destination to other in few seconds, competition of tax heaven countries could foil attempts to increase additional taxes on super rich.
Even though, there is no denying fact that in time like this, the so-called super-rich have a higher obligation towards ensuring the larger public good. This is for multiple reasons – they enjoy a higher capacity to pay with significantly higher levels of disposable incomes compared with the rest, they have a higher stake in ensuring the economy springs back into action, and their current levels of wealth itself is a product of the social contract between the state and its citizens.
Most high-income earners still have the luxury of working from home, and the wealthy can fall back upon their wealth to cope with the temporary shock. In view of several European economists, taxing the wealthy would be the most ‘progressive fiscal tool’, as wealth is far more concentrated than income and consumption.
Conclusion:
Even capitalist countries like United States during emergency time of World War 2 increased taxes up to 90% for significant period of times. However, policy makers should think of other sustainable innovative measures to raise resources and additional tax burden can be last resort.
