Since May 15, the ‘Indignants’ movement in Spain followed by ‘Occupy Wall Street’ demonstrations in the US, street protests have spread and plans are afoot to take them to 951 cities in 82 countries. It is against corporate greed and biting cutbacks in welfare measures. The root cause is really the increasing disparity in income and blatant display of unproductive expenditure and unethical practices by the rich largely seen in the corporate sector.
Economic Policy Initiative, Washington revealed that in the US, top 0.1% of income earners were paid 77 times what was paid to bottom 90% between 1970 and 2006. The top 1% of earners in America (income >$400,000 per year) captured 58% of real economic growth from 1976 to 2007, and now take home roughly 18% of all pre-tax income earned, up from <10% in the 1970s. The top 1% in Britain increased their earnings from 5.9% to 14.6%, from 1976 to 2007. Across the OECD, income inequality as measured by Gini coefficients (which calculate how far an economy is from perfect income equality) rose by roughly 7% from the 1980s to the 2000s. It is on record that more than 10,000 Americans earning > $ 200,000 a year paid no tax in 2007.
Till the 1970s, incremental tax rates on highest income in developed countries were around 60-90%. Even now in the UK, there is a levy of 45% on annual income above £150,000. France and Italy slapped 3% surcharges on those with income above 500,000 and 300,000 euro respectively. In America, Tobin tax on financial transactions and Buffet rule to ensure that no household making more than $1m a year pays a lower average tax rate than middle class families do, have been proposed. The president also wants to raise top federal income tax rate from 35% to 39.6% as was done in the 1990s. It is to be noted here that wealthy Germans and French have signed petitions in favour of higher taxes. The chairman of Ferraris said that it was right for the rich to pay more. Berkley’s Mr. Saez and Peter Diamond, a Nobel laureate at the MIT, say that even taxing investment income is justifiable.
The endemic problem of corruption and black money generation and stacking in overseas banks have been agitating overwhelming section of the populace in India. So much so that the recent unprecedented boom in export is interpreted by some economists to indicate illicit inflow through over-invoicing of exports and round-tripping. Further, as per a World Bank study, 25% of India’s population-projected at 313 million will be living in extreme poverty, meaning earning $1.25 per day in 2015. At the same time, there are obviously many crorepatis in India including 300 MPs. As per Forbes’ list, the combined fortune of the 55 billionaires in India rose from $222 billion in 2010 to $247 billion in 2011. Thus the severity of income disparity in India is by now well established. This signals need for adequate redistribution and substantial addition of income. This would need large public expenditure in housing, health, education and infrastructure. For that government coffer needs to be sufficiently enhanced.
So, the imperative is tax reform and bringing back of black money stashed abroad. Tax rates will have to be much much more progressive at the individual level. A tax on financial transaction may also be worthwhile and ,if feasible, there may, moreover, be consumption/expenditure tax as conspicuous consumption is the hallmark of Indian nouveau riche.
Most importantly, the tax base has to be considerably enlarged as in India only about 4% of population is tax assesses against 20% in China. In proportion to GDP, China’s collection is about five times that of India. It is further to be noted that cost of tax collection in India is a staggering 60%. Tax laws and enforcement has, therefore, to be made sufficiently efficient to discourage tax avoidance/evasion and fund transfer to tax havens can be stopped by strict and adequate government measures. Finally, even if a small proportion of the black money kept abroad, estimated at Rs. 25 lakh crore, can be brought back, our problem would largely be solved.
However, the indirect taxes for corporates may not be tinkered with for supporting particular sector/industry in so-called sectoral recessions. Because Indian trade and industry is now sufficiently matured to meet competition and should as true entrepreneur/ investor in a capitalist system go for risk return trade-off. They should take responsibility for wrong investment decisions if these lack scenario planning or rolling budget or proper risk management techniques.
We are not one of the 82 countries in the thaw of a ‘Capture Wall Street’ type agitation. But that should not hold us back from initiating these tax reforms.
