Inequality has been an intractable issue for centuries, exacerbated in modern times by the unprecedented accumulation of wealth among the top echelons of society. The Global Wealth Report 2024 by UBS estimates that the world’s richest 1% hold more than 45% of global wealth, a stark indication of widening disparity. As the global economic system becomes more skewed, the debate on whether wealth taxes can curb such inequality has resurfaced, with significant implications for both developed and developing economies. Could wealth taxation become a possible remedy to rising inequality, or, as India’s Chief Economic Adviser Dr. V Anantha Nageswaran recently cautioned, a “billionaire tax” shall deter investment?
Globally, income and wealth inequality have reached alarming proportions, with any improvements in shared prosperity having completely stalled. Despite accounting for a staggering 79% of the world’s population, the Global South collectively possesses a mere 31% of global wealth. Even the pandemic, which wreaked havoc on middle-class incomes, only turned out to serve to enrich the wealthiest through a booming stock market and asset inflation. This growing schism between the ultra-rich and the rest is creating economic and social instability. In the United States, for example, billionaires added over US $1 trillion to their wealth during the COVID-19 crisis, and while the growth has slowed since then, the concentration of wealth remains overwhelmingly in the hands of a few. Europe has witnessed similar trends, with nations such as France and Germany grappling with how to address rising inequality while maintaining economic competitiveness.
Wealth taxation is frequently advanced as a solution to this chasm, offering a direct method to redistribute wealth and provide revenue for public goods. However, implementing such a tax raises several questions: Would it be effective in redistributing wealth? Could it be applied uniformly? And, critically, how would it affect the broader economy?
A wealth tax is a levy on an individual’s total net assets, including property, stocks, and bonds. It differs from income tax, which only targets yearly earnings. By directly addressing the wealth accumulated over a lifetime, the tax aims to reduce the concentration of wealth at the top and thereby diminish inequality.
Proponents argue that wealth taxation serves as an effective redistributive tool. Thomas Piketty, in his influential work Capital in the Twenty-First Century, advocates for a progressive global wealth tax, suggesting that the concentration of capital in the hands of a few leads to social unrest and economic inefficiency. In 2024, several countries such as Norway, Spain, Belgium and Switzerland have implemented wealth taxes with varying degrees of success. For example, Spain’s net wealth tax imposes a levy of 0.2-2.5% on assets exceeding €700,000 (excluding a primary residence), generating significant revenue for social welfare programmes.
However, wealth taxes have their detractors. Critics argue that such taxes can lead to capital flight, where the wealthy relocate their assets to more favourable tax regimes, thereby eroding the domestic tax base. They also argue that wealth taxes may be difficult to administer effectively, given the complexities of assessing the value of assets like real estate and business ownership. Furthermore, they contend that wealth taxes could discourage investment and innovation, leading to slower economic growth.
India presents a unique case study for wealth taxation. Historically, India had a wealth tax regime until 2015, when the tax was abolished by the government due to its inadequate revenue generation, compliance burdens galore, extensive litigation and high administrative costs. In accordance with the Wealth Tax Act, 1957, the wealth tax collected in its final year amounted to merely over ₹1,000 crore, a meagre contribution to the government’s coffers. However, as inequality rises, there is growing discourse about reintroducing the tax in some form.
2024 was no different with India continuing to face stark inequality. According to a study of the World Inequality Lab (WIL), the top 1% of India’s population controls nearly 40.5% of the country’s wealth. Despite the government’s significant efforts to uplift the underprivileged through welfare schemes aplenty, key ones being the PM-Kisan and Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY), wealth inequality persists as an impediment to sustainable growth. Reintroducing a wealth tax could potentially fund these programmes more sustainably. India’s vast informal sector and limited tax base – only around 2% of the population pays income tax – mean that wealth taxation could capture revenue from those previously untaxed. This past year, discussions in India have focused on a revamped wealth tax structure targeting ultra-high-net-worth individuals, with exemptions for assets like agricultural land to avoid burdening the rural population. However, as the subject of wealth taxation remains ensconced in the deliberation stage, there are varied arguments both in its favour and in opposition.
A well-calibrated wealth tax holds the potential to be a remedy for several of India’s socio-economic maladies. First and foremost, such a tax – a 2% annual tax on net wealth exceeding ₹10 crore and a 33% inheritance tax on estates exceeding ₹10 crore – could generate a whopping 2.73% of GDP in revenues, which could be judiciously channeled into bolstering healthcare, education, and infrastructure, thereby addressing critical gaps in the country’s welfare landscape. Furthermore, a wealth tax could strike at the very heart of India’s growing inequality, redistributing the amassed fortunes of the top 1% and lending credence to the public clamour for fairness and equity in the fiscal domain. Also, such a measure could serve as a catalytic incentive for wealthier individuals to engage in more productive avenues – be it through philanthropy or reinvestment into business enterprises that spur job creation and foster economic dynamism. This would not only soften the concentration of wealth but also stimulate the broader economy, ensuring a more equitable distribution of resources.
On the other hand, the wealth tax debate is fraught with significant challenges. The Indian tax system, already grappling with enforcement difficulties, particularly when it comes to complex asset valuations, would likely find it an onerous task to accurately assess and monitor wealth in a nation with a vast informal economy. Ergo, the administrative burden, could become insurmountable, undermining the very efficacy of the tax. Furthermore, the spectre of capital flight looms large. The affluent in India, possessing the means to move their assets to more favourable jurisdictions or into intricate tax shelters, could circumvent the tax, as has been observed in other countries with similar levies. This potential exodus of capital could not only erode the domestic tax base but also diminish India’s overall capital stock, thereby negating the tax’s intended redistributive effects. Lastly, the imposition of a wealth tax could deter investment from high-net-worth individuals, many of whom are pivotal players in driving growth in sectors like start-ups and real estate. Such a move might dampen entrepreneurial activity and investment, inadvertently stifling the very economic dynamism that India seeks to cultivate.
Countries like France and Norway, which have implemented wealth taxes, offer instructive lessons. France abolished its wealth tax – Impôt Sur La Fortune (ISF) – in 2017 after it was found to be ineffective; the tax had driven many wealthy individuals to move abroad, reducing the tax base significantly. Similarly, Norway, which levies a 0.85% tax on net wealth of around US$ 170,000, has experienced capital outflow, albeit it continues to raise significant revenue for public services.
India would need to design its wealth tax carefully to avoid similar pitfalls. Policymakers could consider introducing a lower rate of taxation, with higher exemptions to prevent capital flight, while simultaneously closing loopholes that allow tax evasion. An important complement to wealth tax reform would be strengthening India’s tax enforcement mechanisms and improving its digital tax administration.
The reintroduction of wealth taxation in India, as well as its global expansion, holds the potential to address the growing abyss of inequality that has become an urgent economic and moral issue. While the wealth tax is no silver bullet, when crafted intelligently, alongside robust tax administration and investment-friendly policies, it could be a significant step towards a more equitable and inclusive society. The lessons from other nations, combined with India’s unique socio-economic structure, suggest that a progressive wealth tax could indeed contribute to reducing inequality, but its success would depend on prudent design and effective enforcement.
However, it is crucial to note that the views expressed here are the personal opinions of the author, who firmly believes that the real jobs of the future lie in the broader expansion of the private sector, a vision that, while promising, is a long-drawn process requiring a massive investment in education, skill development, and upskilling of the workforce. Such transformative change, though necessary, will take time. Until this vision is realised, we must not allow the ultra-rich to exploit the ultra-poor in the interim. It is the author’s firm conviction that a wealth tax, one that is palatable to those who have worked hard to amass their wealth, should be levied – precisely to ensure that the fruits of this economic system are more equitably distributed. While wealth creators in India must be allowed the space to thrive, they must also bear a commensurate responsibility to uplift the less fortunate, and a progressive wealth tax could serve as an important vehicle to redress the extant iniquitous wealth distribution.