Government contemplates imposing higher tax slabs on the super-rich
January, 17th 2013
The need for higher taxes on the super-rich has become a debating point ever since C Rangarajan, the chairman of the prime minister's economic advisory council, argued for examining the case for introducing a higher income tax slab to augment government revenues. This is in line with current thinking in the United States and France which have raised tax rates.
In India, though, reducing tax rates and expanding the tax base has reaped rich dividends in recent times. Though peak income tax rates have been sharply reduced from 56% in the early 1990s to 30.9% in recent years, income tax collections have gone up from Rs 5,371 crore (1990-91) to Rs 1,66,679 crore (2011-12). More importantly, the share of income tax in total tax collections of the central government has doubled from around 9% to about 18% now.
Lower income tax rates are preferred for many reasons. The most important is that they encourage people to take greater risks and earn more. It also helps them to retain a larger part of their income and thereby boosts savings and investments. Higher investments, especially private investment that is usually more productive than that of the government, lead to faster growth. And faster growth, in turn, will bring in higher tax revenues.
High tax rates, on the other hand, encourage tax evasion and often lead to a flight of capital abroad. The super-rich have abundant opportunities to park fund abroad in low tax economies, or to otherwise structure their finances to escape taxes. Moreover, high tax rates lead to corruption in the tax collection agencies.
Even if one assumes honest tax collection officers abound within the system, the cost of tracking highly mobile funds and enforcing compliance could go higher than revenues raised. One shouldn't blindly emulate American or French examples — history and circumstances are different in India.
Redistribution need of the hour
Why is there so much fuss over doing the right thing? It's only fair that in a soci-ety as deeply unequal as ours, the super-rich should contribute more by way of taxes to the government exchequer than those on the lower rungs of the economic order. It makes little sense to pamper the already pampered and thrust the burden of fiscal debt recovery on the rest of the 99% of the population. Why make the privileged even more privileged than they already are?
The truth is that the ultra-rich have become so used to government concessions that they've come to consider them as their entitlements. It's hardly a wonder then that C Rangarajan's recent advocacy for levying a higher tax on the rich has touched off prickly protests from the privileged business classes.
In the US, Warren Buffett, ranked the world's third richest person, had advocated a 30% tax rate on millionaires. Deriding the 'coddling' of the super-rich, the business tycoon said that his secretary paid more tax than him, even though her income was hardly a fraction of what he made. More recently, US President Barack Obama too has pitched for levying higher taxes on the nation's highest earning individuals and businesses.
Predictably such tax proposals, like in the case of India, also rankled America's wealthiest. They are most reluctant to plough back into the system a fair share of their earnings to make life better for the vast majority — the less privileged.
Underlying the concept of higher taxation for the rich are the principles of fairness and justice. The benefits of economic growth have been mostly cornered by those with more resources, leaving the poorest on the margins. The manifestations of inequality, built up over years and decades, have been coming to the fore in recent years. One way of bringing a sense of justice is by making those who have benefited so hugely from this system, pay more than the rest who haven't.