Super tax on super rich

Dr Ashwani Mahajan
A new and meaningful debate has started, after Dr. Rangarajan, Economic Advisor to the Prime Minister made a statement recently, that the Government may consider imposing of tax at a higher rate than present 30 percent, on the incomes of super rich. If we look back, we find that a much higher rate of tax used to be imposed on incomes of super rich up to 1980s. Highest rate of tax was 97 percent, which implied that if a rich earned an additional income of Rs. 100, Rs. 97 used to be collected as income tax. With time, thanks to new economic policy in the last two decades, marginal rate of tax fell to merely 30 percent (plus surcharge). That is, if a person gets an additional income of Rs. One crore he or she, would hardly be paying 30 lakhs (plus surcharge). Thus super rich are left with huge income, post tax.
Declining Tax Rates Since 1990s
Major argument behind reduction in income tax rates, was that in other countries, a much lower rate of tax is imposed. It was also said that high income tax rates encourage tax evasion and by lowering tax rates, we can encourage tax compliance and raise revenue.
This argument proved right to a great extent and tax revenue increased manifold, after reduction in tax rates. Corporate income tax rate was also reduced along with personal income tax rates. There was hardly any negative impact of the same and whereas in 1980-81, Central Government used to get Rs. 2800 crore only from personal income tax and corporate tax, by 2011-12 this revenue increased to 5 lakh crores, that is 178 time increase. We note that during this period national income at current prices increased by merely 62 times. Thus we can conclude that after reduction is rates of personal income tax and corporate income tax, tax revenue increased by much higher pace than increase in national income.
But the story of lesser tax on rich was not limited to rates of income tax, many more changes were brought about in tax system, to reduce incidence of tax on the rich. For example, income received from dividends is exempted from tax, whereas companies only pay tax on dividends distributed. Today, when marginal rate of income tax is 30 percent, 16 percent tax on dividends is not legitimate. Huge increase in revenue in the last 30 years is primarily due to widening income and wealth inequalities. Statistics reveal that share of wages in national income, which used to be 40 percent in 1990, declined to merely 34 percent in 2010. In 1993-94, in urban areas, top 10 percent of population enjoyed 10.5 times higher consumption as compared to bottom 10 percent population. This ratio has now increased to 14.5 times. In rural India this difference has increased from 7 times to 10 times during the same period. It is no secret that even according to most ill defined poverty line, nearly 37 crore people live with less than Rs. 1000 per month in urban areas and Rs. 800 in rural areas. However, there are a chosen few, with incomes and assets in hundreds of crores of rupees. Inequalities are indicated by Gini-coefficient, which was 0.31 in 1993-94, increased 0.36 in 2009-10. It is shocking that in 2003-04, top one percent of population enjoyed 8.6 percent of national income. As inequalities have further widened since then, if we assume that top one percent population captures ten percent of national income, their per capita income in 2011-12 at current prices would be Rs. 6, 86,054 per annum. Because of fast rising number of super rich and their rising incomes, present marginal rate of tax at 30 per cent does not seem to be appropriate.
USA’s Attempt to tax Super Rich
Recently, immediately before beginning of his second term as US President, Barak Obama has proposed heavy tax on super rich. Obama’s argument is that with the implementation of this proposal, US treasury will gain $1.6 trillion. Today USA is going through worst fiscal crisis. Huge fiscal deficit is forcing the US Government to cut Government spending on social security. Under these circumstances, President Obama had to request US Congress to allow greater public debt. Today, the government is forced to raise tax on rich Americans, who were paying a lower rate of tax. Now it is certain that super rich in America is going to pay more taxes, though there will not be any impact on individuals earning up to $ 2,50,000 and more steeper tax rate would apply on those earning more than $ 4,50,000.
If we see the highest tax rate in other countries of the world, in India highest tax rate is found to be much lower than the developed countries. Significantly highest income tax rate is Australia is 45 percent, in Austria 50 percent, in Canada 53 percent, in China 45 percent, in Denmark 51.5 percent, in France 75 percent, in Germany 45 percent and in Japan it is 50 percent.
Prudent to Impose Higher Tax on Super Rich
In India riches of super rich is increasing day by day. Expensive houses, luxury cars, five star hotels and such other symbols of luxuries; all indicate at rising number of super rich in India. Riches of these super rich are contributing less to the development and more to the luxuries. Condition of poor is deteriorating day by day. It is expected from the Government that it spends more on education, health and other social services to improve the lot of the poor. However, due to paucity of funds and rising fiscal deficit, the Government is forced to reduce its expenditure on these services. Government development expenditure has also been declining day by day. To keep the prices of essential items under control, the Government gives subsidy to maintain the standard of living of the poor. Due to paucity of funds, Government is unable to foot rising subsidy bill. While presenting the budget 2012-13 Finance Minister had indicated clearly that the Government is going to cut this subsidy bill significantly. We find that the Government has actually acted in this direction by limiting quota of LPG cylinder and decontrolling diesel prices.
Under these circumstances, when financial health of the Government is worsening fast, increasing tax on super rich may be a welcome step. Today when the Governments of other countries are also imposing much higher rate of tax than India, increase in tax on super rich cannot be unjustified by any imagination. Significantly if the Government imposes a tax rate of 50 percent on individuals earning more than Rs. 20 lakh per annum, the government may get additional revenue exceeding one lakh crores. Clubs of rich people like Assocham, CII and FICCI etc. may not be very happy with this proposal, but it would be prudent to try this measure to improve the fiscal health of the Government and to finance expenditure for maintenance of living standards of the poor.
(The author is Associate Professor, Department of Economics, P.G.D.A.V. College (University of Delhi)

Follow our WhatsApp channel