Do Piketty’s diagnosis of increasing inequality and the prescription of fighting it with more taxes apply to India? We turned to leading development economist Reetika Khera. She responded in an email interview:
Ashish Mehta | May 15, 2014
On using taxation to reduce income inequality
There is immense unrealised potential for revenue collection in India. Raising tax rates as Piketty suggests, especially raising the top marginal tax rate (from the current 30% to, say, even 35%), is a measure I would support (more on that below).
More importantly, the tax base in India continues to be very narrow. According to the finance minister’s budget speech, only about 3% of the population pays taxes. Compare this with a country such as the US which is supposed to have a pro-rich taxation policy. There it is reported that just over 50% pay income taxes, but even that is considered “low”. Even China has done much better than us: in about 20 years, the proportion paying income tax increased from 0.1% to 20% in 2008!
Another reason for the low tax base in India is tax exemptions. For instance, agricultural incomes remain tax-free even for the 20% farmers who are not small or marginal. What stops the state governments from levying a flat 10% on medium or large farmers? According to the budget documents, revenue foregone due to various exemptions was more than '5 lakh crore in 2013-14. That is about 80% of our total revenue collection! Further, these exemptions tend to be regressive: e.g., the diamond and gold industry is among the highest beneficiaries of exemptions/rebates in custom duties – over '65,000 crores.
Read More: India's 1% problem: Some are less equal than others
Coming back to the top marginal tax rate, the rhetoric of the “aam aadmi” in India is such that people who are at the top of the income distribution in India perceive themselves to be the middle class, and feel sorry for themselves. According to the ILO, the middle class (though difficult to define) includes those whose incomes are between $4-13 per day. Combined with the fact
that many subsidies (e.g., fuel) are enjoyed by the better-off in India, there is plenty of rationale for taxing richer people more.
The top marginal tax rate in Denmark was at 60% in 2013. The US, with its pro-rich taxation policy, set its top rate at 40%. In India, it is only 30%. Certainly we can do better. In order to keep top marginal tax rates low, many argue that the improvement in income tax collections are due to the reduction in marginal tax rates. Certainly that contributed, but the other factor which contributed at least as much – tax deduction at source (TDS) – is never highlighted. The rich (or “aam aadmi”) have too much voice – in the business media, in politics, and elsewhere too – in the Indian system.
On the nexus between economic and social inequalities
The problems of economic and social inequality are deeply connected in India. It is not easy for us to fully appreciate how social inequalities can affect economic outcomes. Consider, for instance, something as “innocent” as rural habitation patterns, where Dalit bastis are physically separate from those of other communities. Often, because sanctions are sought and given by non-Dalits, the most basic amenities such as hand-pumps, roads and electricity come to non-Dalit bastis first. How does this affect economic outcomes? Take the example of public transport, which would stop where the road stops. Combined with the fact that in some areas, Dalits are still not allowed to enter non-Dalit settlements, their access to public transport may be entirely cut off. Further, in some areas, they may not even be allowed in the private shared tempos. Thus, something as simple as commuting (say, to a city for work) turns into a hurdle track for a Dalit person.
The same holds for discrimination faced by women – cultural norms may inhibit (or prohibit even) women’s economic opportunities. Research by Thorat and Attewell in India suggests that call-back rates for job interviews were systematically lower for Muslim sounding names compared with upper-caste Hindu sounding names, even though the CVs were exactly the same.
Unfortunately, there is a great resistance in India in accepting the existence of such social inequalities, and their repercussions on economic outcomes and inequality. Inequality – economic or social – appears to have been completely internalised, to the extent that they are not even recognised as inequalities.