Lately, the debate over wealth taxation has intensified, with proponents arguing for its role in addressing income inequality and funding social programs. However, implementing a wealth tax is not without its challenges and drawbacks. The “proponents” and “detractors” were sharply divided even when the debate of retention and abolition of wealth tax was at its peak till one fine day when the tax under reference was repealed, through Budget 2016-17 to be precise.
Global Experience
Dating back centuries, a tax on accumulated wealth has roots in ancient civilisations such as Mesopotamia, Egypt, Greece, and Rome which imposed taxes on property acquired and inherited. Rome used to levy the Patrimonium tax on the total wealth of its citizens. Feudal societies in medieval Europe relied on wealth taxes to fund wars and support monarchies. France, as a European monarchy, collected the ‘taille,’ a direct tax on households based on the amount of land held.
In the UK, estate duties were introduced to combat rising wealth inequality during the industrialisation of the 18th and 19th centuries. However, it was in the aftermath of World Wars I and II that wealth tax grew prominence, with the introduction of federal estate and gift taxes by the United States in the early 20th century.
With the advent of the 21st century, countries scaled back owing to the insignificant contribution to the overall tax revenues, administrative challenges and concerns about the economic impact.
Indian Context
“King must collect tax like honeybee, enough to sustain but not too much to destroy” ~ Chanakya
India introduced a wealth tax in 1957. Over time, the tax base eroded, compliance became challenging, and inefficient collection led to the abolition of the wealth tax in 2015. The consequential loss to the exchequer was sought to be subrogated through a levy of additional surcharge on the “super rich” under the existing tax regime.
Taxing the Capital
Taxing property unfairly penalises only a select few. This form of tax often leads to double taxation, first when the money is earned and second on the asset acquired with the tax suffered earning. The State should not dictate the virtuous usage of one’s own money.
India aims to reach the $5 trillion economy in the next three years with a vision to be an ‘economic powerhouse’ by 2047. The fact that this aspiration can never be translated to reality without the active support of the so-called ‘ultra-rich’ i.e., the businesspeople, industrialists and the like, can barely be overstated. High-net-worth individuals may alter their investment strategies, asset allocation, or even residency to avoid taxes and protect their assets. It could distort economic behaviour by disincentivising investment, entrepreneurship, and wealth accumulation. Such taxes could lead to reduced investment potential, further undermining economic competitiveness and distorting economic decision-making.
A policy flip-flop environment takes a toll on trust and confidence with enduring economic development being the casualty. It discourages work, savings, and capital formation, potentially hindering innovation and productivity.
Advocates push forward the need to redistribute resources to reduce poverty and promote inclusive growth under the cover of the ability-to-pay principle but with alternative options available and working, taxing the wealthy may be counterintuitive.
Capitalism v/s Socialism
Normatively, the tax policies across jurisdictions are guided by Taxation Doctrines in relation to source, origin, holding, recipient etc. However, the essential features peculiar to a State are influenced by the economic model of the day. Tax as an instrument is used by the State depending on the chosen governance model, which brings the conversation of capitalism vs socialism to the fore.
Capitalism emphasises on ‘increased production’ whereas socialism focuses on ‘fairer distribution’. It is a matter of fact that India embraced a socialist model for its economic governance till the beginning of the last decade of the 20th century when LPG reforms were rolled out and empirical evidence suggests that in the first four decades, more poverty was created than wealth.
The shift from a socialist model to a near-capitalist model (Hybrid system) continues to exert its profound implications on almost all segments of the economy including taxation.
When we adopt a new economic belief as a nation that rejects most of the old model’s principles and favours the opposite framework, it is fair and wise to create policies that align with the new program. Specifically, under this renewed model, solely using tactics to discourage or single out the wealthy as a primary fiscal tool to pursue a socialist agenda could disrupt the current situation and also be subject to ethical and moral objections. Any deviation, even if an aberration, would be a negation of the model-in-vogue.
As a corollary, holding a few responsible for the inequalities that exist could legitimise Marxism’s assertion that capitalism inherently breeds severe economic disparities, justifying the criminal actions of the disadvantaged as a response. Small wonder, such ideologies have failed to elicit acceptance even in jurisdictions where welfarism remains a formidable article of faith.
Besides these two universally acknowledged models, there exists a third model by the name of “restrained consumption” that was introduced by Late Pt. Deendayal Upadhyaya as part of his seminal treatise titled ‘Integral Humanism’. The text opposes unbridled consumerism by drawing inspiration from Indian culture. In hindsight, the concept resonates well with all the aspects that are actively debated under the overarching climate/environment protection.
While the goals of wealth taxation are laudable, its re-entry is likely to bring significant challenges and risks. It could undermine economic efficiency, exacerbate capital flight, and tax evasion. Policymakers must carefully weigh these considerations and explore alternative approaches to address income inequality and promote fiscal sustainability.
Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.
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