Of late, there had been suggestions of imposing a one-time Covid-19 relief cess and/or a wealth tax on India’s super rich population, as this segment is believed to have a higher obligation towards ensuring the larger public good. The government’s initial reaction was not supportive of this idea. However, one feels that eventually the possibility of the wealthier section of the society bearing a higher tax liability for a limited period of time cannot be ruled out against the current complicated macroeconomic backdrop.
Covid-19 has heavily impacted the government’s revenue streams apart from putting a major strain on its expenditure in order to support the economy. This is surely prompting the fiscal authorities to explore various conventional and unconventional measures to boost fiscal health, and the government’s ability to keep supporting the needy. We have already witnessed steps like sharp hike in excise duties or imposing a special tax on items such as petroleum products and alcohol.
One feels that the gravity of the current situation can potentially prompt the government to review its stance as regards adhering to the FRBM targets. In a somewhat similar situation of sudden economic turbulence in 2008, the federal government in India had decisively stepped up fiscal spending to accept a fiscal deficit of nearly 6% of GDP as against their budgeted deficit target of only about 2.5%. Currently, the spread and severity of disruption in the economy is undoubtedly higher than that during 2008, clearly underscoring the case for reviewing the fiscal deficit targets.
International perspective not against a super-rich tax
International and historical instances remain supportive of higher tax liabilities for the rich at times of exigencies. During World War II, the top individual tax rate in the US rose to beyond 90% and stayed there for nearly two decades. World War II was also the time when the US Congress converted the income tax from a “class” tax that applied mostly to those with high incomes to a “mass tax” that most Americans paid.
Even today, the highest tax rate is higher than 50% in case of a number of countries (eg. Portugal, Slovenia, Belgium, Finland, Sweden, Japan, Denmark, France, the Netherlands), where high tax rates on the wealthy helps to redistribute income throughout society, in a bid to ensure a strong social security net and basic necessities for the poor.
Not a perfect option, might still be a reality soon
Irrespective of the government’s initial bias against adopting a super-rich tax, one does not rule out such a possibility in the coming months. Admittedly, it is not an option without shortcomings. Rather, typically only a small number of individuals – often salaried – bear the additional tax and/or cess, while another sizeable segment of the super-rich is believed to unfairly evade such tax burdens. Repeatedly imposing new cess/surcharge on a small group of captive tax-payers is not only unfair to them and acts as an disincentive, but also goes against the principle of lowering the tax rate along with broadening the tax net adopted since the economic liberalisation in 1991 (when the highest income tax rate including surcharge used to be as high as 56%).
Undoubtedly, in the longer run, broadening the tax net remains the key towards better distributive justice and a more egalitarian society. However, in the near-term and against the current macro backdrop, measures like the super-rich tax or surcharge might be difficult to ignore despite certain drawbacks. But, importantly, one feels that such a tax/surcharge should be considered only for a brief and specific period of time (say, 1-2 financial year/s), rather than for an indefinite period.
Effective end-use to help redistributive justice
The redistributive justice attempted by a super-rich tax might achieve its logical conclusion better and faster if the money so collected can be utilised directly for the support of the lower strata of the economy. For instance, supporting the nearly six crore microfinance borrowers of the country remains a case in point here. A lot of micro and small businesses are currently out of action due to the ongoing lockdown. These micro borrowers are typically into businesses that cater to basic and non-discretionary demand of the masses and are generally linked to the local eco-system rather than being dependent on larger and more complicated supply chains.
While the collection from a super-rich surcharge might appear to be limited for supporting the economy as a whole, it can be meaningful for a targeted support programme for the microfinance sector. This can lead to significant reduction in the weaker sections’ distress and their dependence on government support and relief programmes, by instantly boosting their employment and income potential. As a result, it will not only mean recovery from stress with dignity for the poorer section, but also eventually mean less fiscal deficit stress for the government.
*This is part of a multi-article series written by economists and sectoral experts on the path India must take to survive the Covid crisis. The author is Chief Economist & Head of Research in Bandhan Bank. Views are personal. The author thanks Mr. Shubhankar Chakrabarty and Ms. Piyali Bhattacharjee for their assistance.
