Right said Rangarajan

But left unsaid is the implicit assumption that the government will use the money collected by taxing the uber-rich in the correct manner


R Swaminathan | January 7, 2013

C Rangarajan’s suggestion to increase the marginal tax rate on those with higher income will garner a lot of popularity. At first glance it seems to be a valid and well thought out suggestion. After all the rich are getting richer. They always did. But after liberalisation the pace at which the rich have gotten super-rich is astounding. The battle-scarred victor of many a fiscal war and current chairman of the Prime Minister’s Economic Advisory Council, Rangarajan’s reading of the Indian economy has always been impeccably accurate. The phenomenon of the rich getting super-rich, however, is not a particularly Indian one. Every country that has experienced the global flow of capital and technology from Mexico, think of the low profile Carlos Slim – telecom czar and the world’s richest man – to Russia – refer to the flamboyant Roman Abrahamovic who is the owner of Chelsea football club – has seen the emergence of a new class of uber-rich individuals. India is no different.

Rangarajan is suggesting the creation of a new income tax slab, over and above the current highest one of 30%, for those earning ‘substantially more’ than Rs10 lakh per annum. In an implicit manner, the economist in a subtle way is bringing to attention a lesser discussed aspect of the current structure. A person earning Rs10 lakh a year pays the exact same proportion of his income as tax as someone earning Rs10 crore a year. In an apple-to-apple world, it works just fine. But then we live in an apple-to-orange world and such a structure does enforce a perverse form of inequality where the uber-rich gets to keep a greater proportion of his earnings, thus getting a socio-economic leverage that gets stronger with each passing year. The usual suspects opposing such a move would raise the bogey how the government is knocking the bottom of the economy by its penchant for giving ‘everyone a free meal’. But the same suspects, as has often happened in the past, would conveniently ignore the real facts. For instance, bad corporate debt, as brought out by a recent Crisil report, is expected touch US$36 million in the next five years. A prime example is the Kingfisher Airlines that owes banks over Rs700 crore. Yet the Non Performing Assets (NPAs) of banks, both public sector and private sector, is invariably linked narrowly to only agricultural credit and subsidies.

Quite obviously, the bogey has to be taken with a more than a pinch of salt.

The government has to raise revenue. In recent years the expenditure of the government has been increasing and there’s only so much of borrowing that the government can and should do. Even though the fiscal deficit is expected to be capped 5.3%, it is still an unreasonably high number. There is a well defined case for increasing the government’s revenue. Rangarajan is spot on when he says that the deficit cannot be controlled by just cutting down expenditure. No one, however, is disputing three fundamental facts. The first is that rich have gotten richer so fast that they have become uber-rich. The second is that the uber-rich have to contribute more, and proportionately so, in the process of nation-building. The third is that it is primarily the responsibility of the government to provide for those who are marginalised and in the fringes of the social and economic fabric. While suggesting a higher income tax bracket for the super-rich, the veteran economist said unconventional thinking is the need of hour. This is exactly where Rangarajan may have faltered.

He has assumed that increasing the revenues of the government will automatically ensure that the money so collected will be used in the best possible manner to bring in equitable development and empowerment for those Indians who are marginalised and dispossessed. Rangarajan has placed a lot of faith in the ability of the government to execute its grandiose development vision at the ground level. Past record does not inspire too much confidence. Just two years back, the government earned Rs106,219 crore from the auction of 3G spectrum and the Broadband Wireless Access (BWA) license. The 2011-12 annual budget of one of India’s largest ministries, the Ministry of Human Resource Development, is Rs42,000 crore. Yet, if one were to assume in an extremely simplistic fashion that the revenue earned by the government through 3G and BWA would have led to a noticeable increase in human  development parameters between 2010 and 2012 it hasn’t. Officially, 25% of Indians are still illiterate; only 15% of students reach high school, and just 7% graduate. It wasn’t very different in 2010.

Rangarajan is right when he says the uber-rich should be given more responsibility for nation-building. But he is wrong when he says that let’s make them pay more to the government. Since we are on the subject of unconventional thinking, the need of the hour is to figure out ways through which the uber-rich can contribute directly to the social sector, rather than routing it through the government. It could be in the form of incentives for contributions to registered foundations, mandating an increased role and responsibility for CSR activities and for steps like adoption of villages, blocks and districts for specific activities. With all due respects to Rangarajan, nation-building should not and cannot be the sole responsibility of the government and higher taxes should not
necessarily become the only way to give back something worthwhile to the country.




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