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  • May 08, 2024
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“ADDRESSING INEQUALITY: THE CASE FOR PROGRESSIVE TAXATION”

Syllabus:

  • GS-3-Inequality in India and its impact

Focus :

  • Top of Form
  • The article explores the ethical imperative of reducing inequality and advocates for progressive taxation, focusing on wealth and inheritance taxes.
  • It discusses the consequences of high inequality, rationale for progressive taxation, taxation models, economic impact, and policy recommendations to address socio-economic disparities in India.
Source - TH

Introduction:

  • The proposal by Sam Pitroda, Chairman of Indian Overseas Congress, for implementing an
  • inheritance tax has sparked intense debates.
  • This article delves into the rationale behind the need to address high inequality and advocates for progressive taxation as a mechanism to reduce it.
  • Debate sparked by Congress’s Nyay Patra on inequality and wealth concentration.
  • Prime Minister’s comments on wealth redistribution prompt discussions.
  • Rising inequality evidenced by World Inequality database, posing questions on growth.

The Ethical Imperative of Reducing Inequality:

  • Inequality undermines the principle of equal citizenship, allowing a wealthy elite to wield disproportionate power.
  • Wealthy elites can influence socio-economic and political decisions, often to their advantage, as seen in recent scandals like the electoral bonds scam.
  • Such disparities in influence and power pose ethical hazards and threaten democratic ideals.

Consequences of High Inequality:

  • Inequality hampers long-term economic growth by reducing productivity and diverting resources away from essential sectors like education.
  • Place of birth significantly influences lifetime outcomes, perpetuating inequality across generations.
  • High inequality leads to political polarization, increased conflict, and has negative multiplier effects on the economy.
Status of Inequality in India :

1.  Growth in Average Incomes:

  • India’s average income witnessed a real-term growth rate of 2.6% annually from 1960 to 2022.
  • This steady growth reflects the overall improvement in economic conditions and standards of living over the decades.

2.  Emergence of Very High Net Worth Individuals:

  • Between 1990 and 2022, India experienced a significant rise in national wealth, leading to the emergence of very high net worth individuals.
  • The number of individuals with net wealth exceeding $1 billion increased from 1 in 1991 to 162 in 2022, signifying a notable expansion in wealth concentration.

3.  Rise in Percentage of Income Taxpayers:

  • The proportion of adult population filing income tax returns witnessed a remarkable increase over the years.
  • From a mere 1% until the 1990s, the share rose to 5% in 2011 and further to 9% during the period between 2017 and 2020.
  • This trend suggests a broader tax base and potentially improved compliance with tax regulations.

4.  Extreme Levels of Inequality in India:

  • In 2022-23, India’s top 1% of the population owned 22.6% of the national income and a staggering 40.1% of the country’s wealth.
  • This level of wealth concentration underscores the deep-seated inequality within Indian society, surpassing even the disparities witnessed during the colonial British Raj.
  • The term “Billionaire Raj” symbolizes the dominance of India’s modern bourgeoisie, highlighting the exacerbation of inequality in contemporary times.

Rationale for Progressive Taxation:

  • Progressive taxes, such as wealth and inheritance taxes, aim to redistribute wealth and promote investment in productive activities.
  • A progressive tax is a tax system where the tax rate increases as the taxable income or wealth of an individual or entity increases.
  • In a progressive tax system, those with higher incomes pay a larger proportion of their income in taxes compared to those with lower incomes.
  • Inheritance tax, levied once in a lifetime, discourages dynastic control of resources and incentivizes innovation.
  • Revenue generated from such taxes can fund a diversified set of innovations and public expenditures.

Exploring Taxation Models:

  • Wealth tax and inheritance tax target individuals with high wealth, reducing wealth concentration over time.
  • Land value tax (LVT) targets landowners and can be an efficient source of revenue, especially in rural and urban contexts.
  • Despite challenges like tax evasion, research suggests that investing in tax compliance can yield significant returns.

Economic Impact and Policy Recommendations:

  • Economists propose implementing a combination of progressive taxes, like a wealth tax and inheritance tax, to raise additional public expenditure.
  • Revenue generated can be used to ensure socio-economic rights for the poor, including living wages, healthcare, employment, and food security.
  • Political will and technological advancements make these policy recommendations feasible in the current context.

Conclusion:

  • Progressive taxation serves as a vital tool in addressing inequality and promoting socio-economic justice.
  • By implementing measures like wealth and inheritance taxes, governments can redistribute wealth, fund essential public services, and ensure equal opportunities for all citizens.

Source:The Hindu

Mains Practice Question :

GS-3

” Discuss the rationale behind implementing progressive taxation, including wealth and inheritance taxes, as mechanisms to reduce inequality. Evaluate the potential economic impact of such measures and propose policy recommendations to address socio-economic disparities in India.” (250 words)