Should the super-rich be taxed more?

Taxing the super-rich seems to be in vogue. On the heels of similar measures in the western countries, where taxes imposed on the rich are going up as governments struggle to repair their finances, leading economists in India have also pitched this idea.

C Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, has called for higher taxes on persons with incomes beyond a specified threshold.

This proposal is ostensibly to help reduce the widening fiscal deficit as well as bridge the expanding wealth gap.

Will such a move be effective? Or will it turn out to be counter-intuitive?

ET Wealth asked experts from varied backgrounds for their opinion. Here’s what they had to say.









No

AV Srikanth CEO, Motilal Oswal Private Wealth Management



Given the current concerns over the country’s fiscal deficit, levying a higher tax on the super-rich seems to be a natural course of action to take to bridge the gap. We are witnessing similar efforts and debates across the world, even in developed countries like the US and the UK, among others. However, there is a significant difference in the circumstances of these countries and those of ours. According to official data, the number of effective taxpayers in India, as on 31 March 2011, was 33.57 million. This amounts to just 2.77% of the over 1.2 billion population.

It’s a shocking statistic for any country. So, given this low level of tax adherence, it is counter-intuitive to expect a big difference by taxing the super-rich more. The highest slab for individual taxation is close to 30% and this, along with several indirect taxes, means that almost half of the income of the person goes to the government. Rather than raising the taxes for the super-rich, efforts should be made to improve tax adherence as well as impose effective penalties for tax avoidance.

American economist Arthur Laffer has demonstrated most effectively in his ‘Laffer curve’ how low tax rates lead to high tax adherence. So, the government should endeavour to make the tax procedure simpler in order to widen the net of taxpayers. Levying estate duty is a better way to ensure that a portion of the wealth being transmitted comes back to the society. Besides, this doesn’t harm the inheritor financially since the tax will be levied on what is a windfall for him.

Maybe

Sonu Iyer Tax Partner & National Leader, Human Capital Services, Ernst & Young



Inheritance tax and a higher rate of tax for the super-rich are being hotly discussed in the Finance Ministry. Eminent economists, including C Rangarajan, are advising the finance minister to charge a higher marginal tax rate on those with ‘substantially higher income’ to increase the government revenue.

This proposal will also find approval on moral grounds of social equity and inclusive growth. However, there is need for caution and a meaningful evaluation of the proposal before changing the rate of tax in haste. When we talk about higher rate of taxation for the super-rich, it is imperative that we compare the absolute tax rates with the effective tax rates (the tax payable as a percentage of income). India has a lower maximum marginal rate compared with the US and the UK.

However, this marginal rate of 30.9% kicks in at a lower threshold income (Rs 10 lakh). Any increase in the taxation rate must be at a substantially high level of income so that it is truly the super-rich who pay higher taxes. A random change in rates without defining the type of super-rich who are being considered may be counterproductive.

Extremely affluent people in the agricultural sector don’t pay taxes because agricultural income is exempt from tax. Bringing such individuals under the tax ambit would be a more welcome step. Also, tax processes need to be overhauled to identify the wealthy people who are thriving on the parallel black economy, and bring them to book. Taxing even a small percentage of black money will drastically increase the revenue.


Maybe

Indranil Pan Chief Economist, Kotak Mahindra Bank

Should the Indian government be targeting the super-rich class to derive more taxes? This is the latest discussion in economist circles and fits in well after the US raised the taxes for the superrich in order to avoid the fiscal cliff. India is also challenged in terms of trying to contain its fiscal deficit, and any revenue generation from higher taxes would be welcome.

To a certain extent, it will also help in reducing the high income inequality in the economy. However, adequate cost-benefit analysis needs to be conducted before attempting such a scheme. The crucial decision is the cut-off income beyond which an individual should be classified as superrich. In the current environment of high inflation eating into the purses of the Indian middle class, this becomes extremely important.

Statistics seem to indicate that 75% of the income tax collected in the country comes from the people earning more than Rs 10 lakh. The limit might have to be set much higher than Rs 10 lakh (currently the cut-off for the highest tax bracket) so as to prevent the negative implications of a higher income tax on consumption and savings. The limitation in revenue buoyancy can be gauged from the fact that only around 4 lakh people in the country are reported to be declaring an annual income of Rs 20 lakh and upwards. Is India channelling its attention in the wrong direction? Probably yes. The focus should be more on the implementation of the GST if revenue buoyancy is the main objective.