By Sanjay Jha
Also on TEHELKA FW
“ In this world nothing can be said to be certain , except death and taxes.”
( As Occupy Wall Street spreads into a global protest, there is a compelling case for taxing the rich. Rising income inequality is India’s biggest challenge. Why India needs to also introduce differential corporate tax rates! ).
There is a discernible chill in the dealing rooms of Wall Street’s investment banks, forever inebriated on the toxic philosophy of Gordon Gecko; greed. But joining their sleek Jaguars on the pavement outside are now thousands of resolute protestors, carrying placards with arresting messages: I got 99 problems, the rich got none; Banks got bailed-out, we got sold-out, and Occupation is my occupation . Occupy London Stock Exchange has quickly followed on the heels of Occupy Wall Street. In an unusual expostulation of spirited candor, the philanthropist son of the world’s third richest man Warren Buffett, chairman of Berkshire Hathaway has conceded that “ corporations really screw people”. Evidently, following the Arab spring, we now have an American winter, but for entirely different reasons; glaring income inequality. The top 1% earners in America paid 40% share of income tax. Says the Economist; “ the rich have done very well in recent decades, and the richest have done best of all”. With American unemployment at a record 10% the anger on the streets of North Manhattan is understandable. But in India, are we any different? Have we not stretched the income distortions to its maximum elastic levels? Isn’t it time for systemic corrective action ?
The famous Buffet tax is simple math which can be calculated with insouciant ease; in short, Mr Buffett paid a lower average tax rate than his not –so-magnanimously compensated secretary. Now that is elementary commerce; personal income tax rate is higher than capital gains/ dividend tax which comprises of bulk earnings of fat cats of the financial services industry, particularly investment banks, private equity, stock-market brokers and hedge funds. I guess salaried persons are considered second-rate citizens because they do not take crazy risks with other people’s hard-earned cash. Occupy Wall Street is not a contrarian movement to the Tea Party, it is the expression of public revulsion for obscene extravagance of overpaid money sharks. Those who created The Great Recession through their propensity for recklessness.
In India, we have a peculiar dichotomy; burgeoning economic growth for a decade coupled with accentuating inequalities. It is a dangerous mix. Over 120,000 dollar millionaires and 69 dollar billionaires reside in premium luxury homes in India . The aggregate wealth of the latter exceeds USD 280 billion. Alongside co-exists 500-700 million ( depending upon your subjective interpretation ) whose poverty line status of Rs 32 or more is currently undergoing rigorous research upheaval in the Planning Commission . It makes for a grotesque mismatch, whose continued existence threatens our social fabric. The poverty line in US is $ 22000 per annum for a family of 4; India is at $ 100 per month for a family of 5. The gap is disconcertingly high even if you factor in purchasing power parity. There are 40 crore at BPL levels, for heaven’s sake!
Is it fair to apply on a hard-working middle-class man earning more than Rs 8 lakhs the same tax rate as Mukesh Ambani or Vijay Mallya or Ratan Tata? By the same analogy is it appropriate that an SME firm or a start-up or any modest operation pays the same tax rate as Reliance , Infosys, Tata Motors or ITC ? Is our tax system compromising with equity in a trade-off for efficiency? Worse, our low-paid workers do not have the safety net of social security like their counterparts in the west. And everyone pays the same sales tax and other indirect taxes anyway, right?
Instead of conveniently following the conventional model of widening the tax base and lowering the tax rate, what India needs is new bands of tax rates that provides lower-tax at base level, and rises steeply at the higher levels.
For instance, I recommend the following on personal income tax:
Upto Rs 5 lakhs: 0%
5-10 Lakhs: 10%
10-20 lakhs: 20%
20-30 lakhs: 25%
30–50 lakhs: 30%
Above 50 lakhs: 40%
On corporate income-tax, there should be a similar tiered system based on net profit :
Upto 2 crore: 10%
2-10 Crore: 15%
25-100 crore: 25%
Above 100 crore: 40%
Needless to add, but the tax structure can change periodically depending upon our fiscal fitness. It is time for out-of-the-box thinking. Wealth tax , for instance, requires a certain review upwards. We also need to scrap meaningless deductions for tax avoidance. As a country, we are at a unique cross-road, we need a radical fresh innovative approach to our economic model shorn of traditional panacea. I am not suggesting robbing Peter to pay Paul, but to give Paul his basic pocket-money. Besides, it will increase consumer spending power and lower administrative burden of micro-tax management .
The rich actually get away with double-bonanza of benefits; low corporate and personal tax rates corresponding to capacity to pay. There is a strong argument in favor of minimizing the tax rate gap between salaries and bonuses and capital gains and dividends It exacerbates the sharp income divide. There is a compelling case for raising taxes on the crème de la crème , without the exaggerated apprehensions of an investment backlash or tax evasion. Despite a top tax rate of 50% doesn’t London still remain a formidable financial center???Is it any surprise that in Italy a special levy for those earning more than USD 410000 and in France of Euro 500,000 are now being doggedly pursued. Inequality is a global phenomenon, only, in India both its magnitude and acuteness is shockingly high. We cannot pretend to turn a blind eye to it. Moreover, we need large public resources to fund welfare schemes. Taxation will have to be integral to budgetary plans. We have a difficult predicament which remains unresolved by our gigantic GDP size or even per capita income; there is a severe disproportionate distribution of assets.
The old classical argument correlating high income tax rates with and tax evasion needs to be looked at afresh. Procedures are less red-tape, electronic-filing systems have introduced transparency, bureaucratic procedures are relatively simplified, and a Lok Pal bill is round the corner that will cover government , corporate sector, public-private partnerships and PSU’s. Thus, the trade off between high tax rate and evasion may not be as symmetrical as before. Likewise, a differential corporate tax which provides exemption at lower levels for start-ups, SME’s will actually encourage entrepreneurship instead of the hackneyed assumption of it being a disincentive for the highly affluent.
For India the big transformational change will come through cashless transfers for welfare schemes through UID Adhaar of approximately Rs 300,000 crores . Even a 10% operational leakage is a staggering Rs 30,000 crores almost equal to CBI’s alleged estimation of 2 G loss. MNREGA, RFS, RTE, etc will need public spending and we need to increase tax revenues ; supply-side economics that depends on pure growth stimulus has serious limitations. While we need to unleash reforms and privatize operations for an efficient corporate India, we need to concurrently invest in education, health, skills and infrastructure. Somewhere in the midst of our gold-rush bullet-train, we need to ponder over the fate of 700 million Indians who may never understand the big India story. For the world’s largest democracy, lifting a huge mass of humanity up the poverty curve is its litmus test, its gargantuan challenge. After all every 1% uplift will alter over 10 million human lives. It is time to make a renewed beginning. Now.
The author is Co-Founder, HamaraCongress.com. He can be followed on Twitter@JhaSanjay