Tackling Extreme Inequality in India | Taxes

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Despite a substantial decline in poverty, a persistent increase in inequality in favour of the top 1 per cent of the population over the decades has been a global phenomenon. Like many other countries, it is an area of concern also for India. The problem can be addressed through initiatives of proper taxation and expenditure policies domestically
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  TACKLING EXTREME INEQUALITY IN INDIA 1   TACKLING EXTREME INEQUALITY IN INDIA JANUARY 2017 authored BY: Sakti Golder & Pallavi Gupta INPUTS BY: Nisha Agrawal, Ranu Bhogal, Rina Soni, Avantika Shrivastava & Ravi Prakash  TACKLING EXTREME INEQUALITY IN INDIA 2 Despite a substantial decline in poverty, a persistent increase in inequality in favour of the top 1 per cent of the population over the decades has been a global phenomenon. Like many other countries, it is an area of concern also for India. The problem can be addressed through initiatives of proper taxation and expenditure policies domestically; complemented by concerted effort of countries to check some transnational problems, viz. tax havens, tax dodging and tax avoidance. This would turn help create an economy whose primary purpose is to benefit the 99 per cent of humanity. Taxation policies can reduce inequality and simultaneously augment revenues to the government, which can further be invested on health and education to create equal opportunity for all.  TACKLING EXTREME INEQUALITY IN INDIA 3 In the past few decades, there has been substantial reduction in extreme poverty across the globe. A marked progress in poverty reduction is visible especially during 1990 to 2010; and in this period, there has been a 50 per cent reduction 1  in the number of people living below the extreme poverty line. Despite the apparent successes; worldwide, one in eight people still go to bed hungry 2 . So, eradicating extreme poverty, which the world leaders have committed to, is still a distant goal. At the same time, evidence suggests that one of the key obstacles to eradicate poverty is ‘inequality’, which has been increasing over the years and has reached its ‘new extreme’ 1  recently. The richest 1 per cent now have more wealth than the rest of the world combined and it is more alarming that ‘power and privilege is being used to skew the economic system to increase the gap between the richest and the rest’ 1 . The inequality problem is further exacerbated as the richest individuals are hiding their wealth using a global network of tax havens. As per recent estimates, tax havens enable the richest individuals to hide $7.6 trillion 1 . It is estimated by Oxfam that in 2015, just 62 individuals had the same wealth as the 3.6 billion bottom half of humanity whereas in 2010 the corresponding figure was 388 individuals. During 2010 to 2015, wealth of the richest 62 people has risen by 45 per cent, that is an increase of more than half a trillion dollars ($542bn), to $1.76 trillion. However, in the same period, the wealth of the bottom half dropped by 38 per cent which is a decrease by just over a trillion dollars 1 . It implies that far from trickling down, income and wealth are instead being sucked upwards at an alarming rate. Had inequality within countries not grown during that period, an extra 200 million people would have escaped poverty. So, it is clear that the fight against poverty will not be won until the inequality crisis is tackled properly. In case of India too, there has been a considerable increase in inequality with the spending gap between the rich and poor almost doubling in the last five years 3 . In India, the richest 1 per cent of Indians have 58 per cent of total Indian wealth. Fifty seven billionaires have the same amount of wealth as the bottom 70 per cent of India. If India were to stop rising inequality, and instead hold inequality levels static, by 2019 we could lift 90 million people out of extreme poverty. Reducing inequality by 10 points, the equivalent of a 36 per cent reduction, could almost eliminate extreme poverty 1 An Economy for the 1%, Oxfam Brieng Paper, Oxfam GB, 18 th  January 2016 2 An Economy for the 99%, Oxfam Brieng Paper, Oxfam GB,16, January, 2017 3 Kundu, P. (2014), Major Dimension of Inequalities in India: Taxation, CBGA 2014 altogether, by the uplift of a further 83 million people 4 .Against this backdrop, taxation policy, among other things, could be an effective tool for addressing the deep rooted problem of poverty and inequality simultaneously. The resources generated through taxation could further be used for social services, viz. health and education. In this context, it is noteworthy to mention that one of the primary reasons why developing countries struggle to invest in public services like education and health is the lack of sufficient funds. Drawing upon the evidence, Oxfam India recommends the followings:1. Introducing an Inheritance Tax and Raising the Wealth Tax;2. Not reducing existing Corporate Tax rates and eliminating tax exemptions for corporates;3. Cracking down on tax dodging by corporates and rich individuals, and ending the era of tax havens;4. Increasing public expenditure on health from 1 per cent to 3 per cent of GDP; and5. Increasing public expenditure on education from 3 per cent of GDP to 6 per cent. Introducing an Inheritance Tax and Raising the Wealth Tax: In the context of growing social inequity and injustice, inheritance tax and wealth tax could be an option to curb these as well as to generate additional resources. The philosophy behind inheritance taxes is that wealth should be created and earned, rather than inherited. It is the fact that once a fortune is accumulated or acquired it develops a momentum of its own. The super-rich have the money to spend on multiple investment options to secure annual returns far higher than ordinary savers and it leads to growing concentration of wealth. As per the 2016 Forbes list, 1,810 dollar billionaires own $6.5 trillion which is equivalent to the wealth of the bottom 70 per cent of humanity. Oxfam’s report found that whilst some billionaires owe their fortunes exclusively to hard work and talent, half of the world’s billionaire wealth is either inherited or the result of crony connections with government. For developing countries, 71 per cent of billionaire wealth is either inherited or the result of crony connections. Global financial services company UBS has projected that over the next 20 years, 500 people will hand over $2.1 trillion to their heirs. India is also experiencing a similar type of growing 4 Nisha Agrawal & Namit, Agarwal, Inequality and the In - dian Private Sector, IIC Quarterly, Autumn 2016, Vol. 43, No. 2  TACKLING EXTREME INEQUALITY IN INDIA 4 concentration of inherited wealth. In India, where direct tax revenue is low, for augmenting it, inheritance tax and wealth tax are yet to be explored properly. It should be noted here that in several G20 and BRICS countries, wealth tax is an important source of direct tax revenue 1 . The proportion of wealth tax in total gross tax revenue is one of the lowest in India - 0.09% only, that is, 0.009% of the GDP for 2011-12. Wealth tax has declined to 0.07 per cent of gross tax revenue in 2015-16, which is equivalent to 0.08 per cent of GDP. A conservative estimate has shown that the revenue potential of inheritance tax and wealth tax in India is around 0.8 per cent of the GDP (for 2011-12) 1 . In between 2000 and 2013, India’s private wealth has reportedly increased drastically from USD 1.2 trillion to 3.6 trillion, that is, an increase by 300 per cent 1 . State of World Wealth Report 2  reveals that only about 20 per cent of this wealth is owned by the bottom 70 percent of India’s households. The number of billionaires in India increased from only 2 in the mid-1990s to 46 in 2012 (Forbes, 2012) and their wealth constituted 10 per cent of India’s GDP in 2012. The number of billionaires has increased further to 111 3  in 2016. Wealth held by billionaires in India came from three major sources - inheritance, self-made and ‘inherited and growing’ 4 . While a sizeable number of billionaires (21) are ‘self-made’, as revealed by a recent study done by Gandhi and Walton (2012) 5 , about 40% of total billionaire wealth is in the ‘inherited and growing’ category. Further, 1 Kundu, P. (2014), Major Dimension Inequalities in India: Taxation, CBGA 20142 State of World Wealth Report, Credit Suisse, a Switzer  - land based global bank, 2013 3 No. of Billionaires in India, in 2016 is 111. (Source: http://www.dnaindia.com/money/report-china-defeats-us-to-have-most-number-of-billionaires-in-2016-india- no3-2181962  )4 The terms coined in the Forbes list. This is the group of billionaires who inherited their wealth and subsequently experienced substantial growth in wealth.5 A. Gandhi and M. Walton, 2012, “Where do India’s Bil - lionaires get their Wealth?”, Economic and Political Week - ly, Vol. – XLVII, No. 40, October 6, pp.1-14. the study also found that all of these billionaires are associated with corporate activities and notable wealth creation occurred in sectors with substantial potential for rent extraction and rent sharing between private and government players. It is also noteworthy that income inequality is underestimated due to hidden wealth, owned mostly by the richest segment of the population. In his 2013-14 budget speech, the Union Finance Minister Mr. P. Chidambaram, had quoted that out of the 3.7 crore income tax assesses in India, only 42,800 people’s declared income was more than Rs. 1 crore a year. It is definitely a gross underestimation. Further, the official estimates of income, due to unavailability of information, also fail to capture the assets held by some people in offshore ‘tax havens’ (e.g. Mauritius, Cyprus, Cayman Islands etc.  Against this backdrop, it is imperative that Government of India introduce inheritance tax and raise the tax rate 6  on wealth. Not reducing existing Corporate Tax rates and eliminating tax exemptions for Corporates: Oxfam’s research 7  identified three core elements of corporate tax competition, such as, lowering corporate tax rates, offering wasteful tax incentives and a lack of international cooperation against tax avoidance due to these elements governments across the globe incur huge loss in revenue collection. Countries often lower their corporate income tax rates in response to other countries doing the same, and often for unfounded reasons. There is a deeply entrenched assumption among governments that lowering corporate taxation is necessary to attract investment or to realise growth. Often this assumption is unfounded. When Australia planned to cut its corporate tax rates from 30 to 25 per cent, analysis by the Australian Commonwealth Treasury showed that it would only result in a very small increase in employment (0.1 per 6 At present in India, Wealth-tax is levied at only 1% on the net wealth in excess of Rs. 30 lakhs.7 Tax Battles, Oxfam GB, 12 th  December 2016. Source: http://www.livemint.com/Money/ybhCrBCOyXfRapVgNHPNVL/The-budget-should-cut-corporate-tax-rates-dras-tically.html Note: It should be noted that if all exemptions are taken into account, effective corporate tax rates in India will be around 23 per cent or so, as mentioned in the Budget speech 2016.
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