Why Taxing The Rich Looks Great — Only on Paper

In a nation of 1.3 billion, less than 2% of citizens pay income tax. In the past 4 years, the government has been able to collect less than 45% of its target. With the lockdown effect on taxpayers, tax collection is bound to fall even further. Temporary tax reforms would naturally be on the table while formulating policy to deal with the upcoming recession.

A few weeks ago, a group of 50 officers from the IRSA (Indian Revenue Service Association) came up with a FORCE (Fiscal Options & Response to Covid-19 Epidemic) report proposing, amongst other things, higher taxation for the rich and an additional Covid-19 cess for incomes more than Rs.10 lakh a year. While the decision to make the report public was under fire from the IT department and the CBDT, the whole turn of events brought to light the age-old question Is taxing the rich more really a solution?

What did the FORCE report propose?

  • 40% personal income tax for individuals earning more than Rs.1 crore a year. This can easily go beyond 50% with GST, double tax on dividends, and cess.

  • Wealth tax for persons with assets of value greater than Rs.5 crore.

  • Bringing back inheritance tax (which was in force till 1985)

  • 4% Covid Cess for individuals earning more than Rs.10 lakh per year (adding to the already applicable 4% cess for education and health).

  • Additional taxes for multinational corporations.

Why the rich should be taxed more- a Buffet perspective

Warren Buffet has famously declared that he pays even lesser tax than some of his employees. The ‘Buffet Rule’ proposed by the Obama government in 2011 was a plan that called for greater taxes on the rich. Recently, US lawmaker Alexandria Octavia-Cortez had proposed a 70% marginal tax on incomes above $10 million. All of it comes from a need to bridge income inequality.

Talking of income inequality, India’s top 1% holds around 35%-60% of national wealth. India is easily amongst the top three most unequal countries in the world. This kind of stark contrast only makes taxing the rich and super rich morally sound in the spirit of curbing the increasing gap. Another factor is estate duty, inheritance taxes and wealth taxes. Inheritances are basically windfall gains for the inheritors, so a higher tax rate won’t really pinch them a lot. Until 2015, India also had a wealth tax. A wealth tax makes sense on the count that a lot of high net individuals put their income in assets to avoid tax.

The difference between ethical and practical

Alice Smith had once tweeted,

"The higher the tax, the less the business can invest.

The less the business can invest, the less wealth created.

The less wealth created, the less wealth there is to tax.

The less wealth to tax, the less tax revenue.

The less tax revenue, the higher the tax"

The argument against higher taxes for the wealthy couldn’t have been put in simpler words. Higher taxes would only lead the rich to invest lesser. Lower investment is the last thing our economy needs at a time when the IMF’s growth rate projection for India is a scary 1.9%. This doesn’t help anyone as lower growth also means lesser jobs for the masses. The famous ‘Laffer curve’ theory suggests that when tax rates are increased, tax collection initially increases, but at very high rates, it begins to fall. That is one of the reasons why income tax rates in India have been declining since after the 70s.

Coming back to Warren Buffet, the reason he pays lesser tax than some of his employees is that he can put his money in assets, charities, and use exemptions to reduce his taxable income. Citizens in the middle income groups cannot afford top-level tax advisors like the rich do. The rich will only be encouraged to park their money in tax havens like Cayman Islands and Dubai, where no income tax is levied. This is again counterproductive as investment isn’t being boosted. More and more HNIs (High Net Worth Individuals) are seeking citizenship in tax havens each year. In 2018, 5000 of them left India.

Introduction of wealth tax and inheritance tax would also be a defeatist venture. The reason why the wealth tax was abolished by Arun Jaitley in 2015 was that the sheer administrative cost of collection of the tax was outgrowing the actual collection, and a similar case had happened with estate duty back in the 80s.

Rates vs compliance

The ruling government has always had a strong focus on low tax rates and high tax compliance. Although compliance has steadily increased in the past 5 odd years, a lot still remains to be achieved. The compliance rate amongst individual taxpayers in 2018 was only 11.6%. Maybe what the government needs is not another rate hike or cess but a sustained effort to increase tax adherence which will fix the system for good.

The buck doesn’t stop at mere collection of taxes. In countries like France, where education and healthcare is largely state-funded, higher taxes for the rich are socially justified to some extent. However, India has a long way to go for such a level of administrative, infrastructural, and social upheaval.

The government has its hands full with saving our citizens and devising a damage repair for enterprises. Taxation policies are a part of overall policy and cannot be the only solution. Instead, let’s call for increased liquidity, exports, and attracting outsourcing of digital industries with a skilled workforce.


Snehal is Columnist at GGI.

She is a writer, poet, music aficionado, Oxford comma proponent, and a lot of other things. She also writes on personal finance for 'Qrius Creative Labs'. She has worked as a copywriter, content writer, scriptwriter, creative strategist, and direction assistant at multiple organisations in the past. 

Snehal is a graduate from the  Bachelor in Mass Media, Advertising from St.Xavier's College, Bombay.

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