There has been a renewed debate on the wealth tax in a number of countries. The debate has been ignited by the growing inequality and excessive expenditure incurred by the State due to the economic crisis caused by the Covid-19 pandemic. Various reports have highlighted how the pandemic has led to increased inequality and unequal income distribution amongst different classes. According to Oxfam’s The Inequality Virus report, India’s billionaires increased their wealth by 35 per cent while 25 per cent of the population earned just Rs 3,000 as income.
The justification for the imposition of the wealth tax is based on economic, constitutional and social welfare arguments that focus on progressive taxation as a way of improving equality and economic mobility. But some economists also affirm that a wealth tax adversely impacts economic efficiency, distorts market functions and hardly helps in addressing inequality.
The concept of wealth taxation emerged as a way of progressive taxation that taxes individuals according to their ability to pay and allows the government to raise revenue in a manner that limits economic inequality. This has been the underlying argument in the existing literature on wealth tax because income tax by itself is not sufficient to account for the excessive wealth possessed by individuals. Income here refers to a measure of net receipts from market transactions or imputed income benefits from self-provided services, whereas wealth refers to financial and non-financial assets that can be valued at their prevailing market prices and are marketable. A basic justification for taxing wealth periodically is that if a taxpayer has acquired wealth over a period, his ability to pay is greater than someone with the same income but no wealth. Taxpayers having parental wealth, accumulated over time in the form of movable and immovable assets, enjoy greater capital income. Such wealth accumulation allows for creating better opportunities by way of parental stock of wealth and also affects labour income mobility.
The general rule is that taxpayers must be taxed according to their ability to pay monetary tax. Taxpayers with greater wealth by way of savings, it is argued, have a greater ability to pay compared to a spender who has exhausted his wealth. However, this line of reasoning is often objected to by the scholars who oppose wealth tax on the ground that it treats wealth-savers and wealth-spenders differently. This argument can be countered with the help of relative economic theory. Unequal distribution of economic resources and market power lead to an unequal division of social and political power. The theory highlights how wealth inequality creates social hierarchies and justifies taxing savers and spenders differently. This is because with wealth comes social capital, which allows individuals to prioritize their choices by exerting their market power. Those with lesser capital are restrained from exercising their choice because of the paucity of economic resources. Moreover, the link between political power and contributive capacity allows the super-rich to influence the policies drafted by the State which, in turn, helps them multiply their wealth.
While a progressive income tax can be one way of taxing based on one’s ability to pay, it is insufficient when it comes to the distribution of resources. The most compelling argument in favour of a wealth tax is that it furthers the constitutional goal of equality. The right to equality of opportunities is one of the founding principles of most Constitutions, including that of India. If wealth tax is structured properly, it could help expand the horizon of equality based on the principle of ability to pay.
It would be a step in the right direction if the State were to move from mouthing platitudes of equality towards ensuring that every citizen is offered education, relief from poverty, and social security.
Gunjan Shrivastav is student at the National Law School of India University, Bangalore