Fair Taxes for Reducing Inequality in India 

Source: The post Fair Taxes for Reducing Inequality in India has been created, based on the article “Dis/Agree: Taxing the rich more will reduce inequality” published in “Indian Express” on 27th December 2024 

UPSC Syllabus Topic: GS Paper3- Economy-Indian Economy and issues relating to planning, mobilisation, of resources, growth, development and employment. 

Context: The article highlights India’s low public spending, growing inequality, and the need for progressive taxation. It suggests taxing the super-rich fairly, including wealth taxes, to fund essential services, reduce inequality, and improve economic and social conditions. 

For detailed information on Redistribution of wealth and Wealth Tax in India read this article here 

What is the Current State of Public Spending and Inequality in India? 

1. Public spending is inadequate to meet basic social and economic rights like food, healthcare, education, and housing.
2. Climate adaptation and green transition investments are also below the minimum requirement.
3. India is among the most unequal countries, with most GDP gains benefiting the top 10%.
4. India’s tax-to-GDP ratio is one of the lowest in the G20.
5. This inequality has led to stagnated mass consumption, reduced private investments, and increased social divisions.

What is the Tax Problem in India? 

1. Low Tax-to-GDP Ratio: India’s tax-to-GDP ratio is among the lowest in G20 and below many middle-income countries.
2. Regressive Tax System: The tax system relies heavily on indirect taxes, burdening the poor and middle classes.
3. Tax Avoidance by the Rich: Ultra-rich individuals exploit loopholes and tax havens, paying lower effective tax rates than salaried people.

How Has Inequality Affected Economic Growth and Social Cohesion? 

1. Extreme inequality has not spurred investment or productivity but has led to economic stagnation and less private investment. 
2. It has also increased social and political tensions, suggesting persistent poverty, despite government efforts to alter data and indices to hide this issue.

How Could Taxing the Super-Rich Help? 

1. The G20 Summit and economists like Gabriel Zucman advocate for taxing ultra-high-net-worth individuals more effectively. 
2. Proposals include a global minimum wealth tax of 2% for billionaires and similar measures for those with assets over $100 million. 
3. This approach requires international cooperation and better financial transparency.
4. Fair taxation of the rich can generate significant revenue for public spending. It can reduce inequality, fund essential services, and improve economic and social conditions.
5. India’s current situation demands progressive fiscal policies to address these issues.

What Are the Challenges and Benefits of Implementing Wealth Taxes? 

1. While administering a wealth tax in India may seem challenging, digital advancements have made it more feasible. 
2. Taxing the wealthy fairly could increase government revenue and help reduce economic disparities, despite concerns that it might deter investment or encourage wealth migration.

For detailed information on Challenges of implementing a wealth tax read this article here 

Question for practice: 

Discuss how taxing the super-rich could address India’s issues of low public spending and growing inequality.