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Tax elite to reduce inequality
January, 22nd 2016

French economist Thomas Piketty says he hopes the Indian elite will pay more taxes on wealth and income, as the country’s tax-to-GDP ratio of less than 11 per cent is insufficient to meet its challenges of inequalities. The aim should be to evolve the ratio towards 30-50 per cent, as in the U.S. and west European countries.

“India has zero wealth tax… I hope the Indian elite will behave much more responsibly [in paying more taxes] than the western elite did in the 20th century,” he told The Hindu in an interview.

Drawing a comparison with China, the author of the best-seller Capital in the Twenty-First Century said: “The Chinese Communist Party has been much more successful than the democratic and parliamentary Indian elites in mobilising significant resources to finance a strategy of social investment and public services.” India’s public health system has a budget of barely 0.5 per cent of GDP, compared with almost 3 per cent in China.

His observations follow new research — based on the World Bank’s poverty data — that show the burden of cutting global inequality now rests largely on India as China has been successful in doing it. At the same time, the Modi government has announced its intention of reducing the rate of taxation of corporate incomes to 25 per cent (with corresponding withdrawals of exemptions), which is lower than in rich countries.

Mr. Piketty, whose book transformed the understanding of the history of wealth and its distribution, said for India to meet its huge challenges of inequalities the elite would have to start paying more taxes.

The current tax-to-GDP ratio — of between 10 per cent and 11 per cent — is insufficient for meeting India’s huge challenges of inequalities, the French economist said. The aim should be to evolve the ratio toward the 30 per cent to 50 per cent levels now seen in the U.S. and some of the West European countries.

“I hope Indian elite will behave much more responsibly than the western elite did in the 20th century…. True reforms are yet to come in the public funding of the education system and improvement in the transparency in the tax collection system has not happened yet,” Mr. Piketty said in an exclusive interview to The Hindu on Thursday. He was in Delhi to deliver a lecture on Inequality and Capitalism.

Communist China has fared better than India at collecting taxes from the elite which is evident from the stark difference in the public spending between the two countries for instance, on health, he said. The public health system in India has a budget of less than one per cent of GDP as compared with almost three per cent in China. “The Chinese Communist Party has been much more successful than the democratic and parliamentary Indian elites in mobilising resources to finance social investment and public services.”

Mr. Piketty’s documentation of the evolution of income and wealth over the past 300 years in the rich countries shows that from about 1914 to the 1970s there was an historical outlier in which both income inequality and the stock of wealth (relative to GDP) fell dramatically.

This was on account of the political shocks and because of an increase in tax rates in the rich countries in response to the world wars. Since the 1970s both wealth and income gaps were rising toward their pre-20th-century norms, he said. Between 1980 and 2007, 70 per cent of the addition to gross domestic product, especially in the rich countries, went to the top 10 per cent of the “elite” population. In contrast, the per capita incomes rose just about 1.5 per cent a year.

“Income and wealth concentration in India today is probably very high by international and historical standards. It is probably close to Brazil and South Africa (top 10 per cent income share = 50-60 percent of total income) than to U.S. (top income share = 45-50 per cent of total income) or Europe (top 10 per cent income share = 30-35 per cent).”

One of the factors that explain this concentration of wealth is that inherited wealth and invested capital — in the stock market, in real estate — will grow faster than income. Inequality, however, needs not just economic but also social and political strategies, he said. “It’s a matter of policies and institutions.”

In India, the preferential admission policies of caste-based quota and reservation systems in education, he said, in the long-run should be gradually transformed into rules founded on universal social criteria such as parental income or place of residence. “

Mr. Piketty said he was eagerly waiting for the socio economic caste census of 2011 and could not understand why a country that passed a law for right to information would delay releasing the findings of the census: “India passed the right to information act in 2005, right... That was ten years ago... What’s the point of doing the census and not releasing the data.”

India is “unique” as far as transparency is concerned.

“India used to publish income tax statistics but discontinued in 2000 after publishing for decades… transparency is a problem in every country but only in India it is falling.”

In the absence of data it is not possible to show the evolution of wealth in India as a result of which “we could be vastly underestimating inequality.” The data is needed to limit the concentration of wealth, fight corruption and assess the efficacy of India’s tax policy choices.

Surge in CEO incomes

The sharp surge in the incomes of top CEOs in rich countries cannot all be explained by increased productivities for which there is no evidence at all, he said. It can, however, be explained by falling taxation rates and issues of corporate governance.

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