HomeEconomyWealth Redistribution Tempest: Much ado about nothing (read no vote bank)?

Wealth Redistribution Tempest: Much ado about nothing (read no vote bank)?

Wealth redistribution – an idea mooted by Congress leader Rahul Gandhi and rebuked by India‘s Prime Minister Narendra Modi as ‘dangerous’ – has rattled the political arena in the world’s largest democracy, which is nearing the end of a weeks-long election battle to cherry pick the next government.Congress leader Rahul Gandhi vowed that if the Congress wins this year’s Lok Sabha elections, the party would conduct a survey to assess who possesses most wealth in the country and take steps to redistribute it. However, PM Modi stirred controversy by suggesting in a campaign speech that if the Congress were to come into power, it would redistribute wealth to Muslims. He cited former PM Manmohan Singh’s statement, suggesting that the minority community had priority access to the nation’s resources.

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The political slugfest became more intense when Sam Pitroda, former chairman of Indian Overseas Congress, explained Congress’ rationale behind the wealth redistribution idea that sparked fear that 50% of wealth should go to the public. He fuelled the controversy by proposing inheritance tax as a way to redistribute wealth. Pitroda later clarified his stance. He said: “Who said 55% will be taken away? Who said something like this should be done in India ? Why is BJP and media in panic?”

Congress had distanced itself from Pitroda’s comments.

Nonetheless, the wealth redistribution row has hardly left the Lok Sabha election campaign stage. While it became a ‘hot topic’ for the ruling Bharatiya Janata Party to trade barbs against Congress amid election heat, the Grand Old Party and its leaders, from Rahul Gandhi to Jairam Ramesh, defended the idea and what is represented.Also Read: Wealth redistribution: The economics behind Rahul Gandhi’s ‘Robin Hood’ ideaWealth distribution a key agenda to swing votes?

While it may have started off as a fight to swing votes, a new study suggested India should impose wealth tax on the ultra-rich to tackle wealth inequality.

Also Read: Study suggests India should impose wealth tax on the ultra-rich to tackle wealth inequality

But what is more interesting, is the lead author of a report from World Inequality Lab, which suggested imposition of a wealth tax to correct inequalities in India, said there will be no vote-bank threat if a tax is imposed on the assets of the wealthy, as it will not impact 99.96% of the population.

“Since the proposed tax does not impact 99.96% of the population, there is no vote bank threat. On the issue of trusts, a lot of improvement is required to fully design the taxation,” said Nitin Kumar Bharti, the lead author of the World Inequality Lab report.

Will wealth tax debate have a plain-vanilla end?

While experts say that its impact can only be on negligible sections of the society, politicians won’t necessarily drop it as an agenda for political debates.

The Congress party has suggested reallocating some resources to traditionally marginalised economic and caste-based communities. But, Modi and the BJP have accused the opposition of plotting to transfer wealth from Hindu households to Muslims.

That shows it is a trump card when the political leaders are delivering their speeches to masses attending political rallies or even those sitting at the comfort of the home watching the news or campaign speeches either on their iPhones or a simple smartphone (hinting at K-shaped recovery? We will come to that).

Also Read: Economist Gautam Sen gives ’12 crore’ reasons why Rahul Gandhi’s wealth distribution plan won’t work in India

For an issue that hogged such political limelight, it would look like a plain-vanilla end to the controversy if it isn’t affecting the vote bank.

While India is now the world’s most populous country, the percentage of citizens filing income tax returns have also surged – indicating rising wealth. However, just 2.2% of the adult population in India are income tax payers, which is 88 crore people approximately, according to ToI. Out of that, imagine the miniscule percentage of ultra-rich filing tax.

How many ultra-rich are in India?

A new study co-authored by economist Thomas Piketty reveals that 0.04% of the adult population holds more than a quarter of the total wealth. Imposing this tax would only affect this small fraction, leaving 99.96% of adults unaffected.

The paper, released on May 24, proposed imposing a 2% annual tax on net wealth exceeding Rs 10 crore, along with a 33% inheritance tax on estates exceeding Rs 10 crore in valuation. According to the paper, this could generate revenue equivalent to 2.73% of the gross domestic product (GDP).

What this perhaps suggests is that truly the number of votes that can swing from the wealth distribution won’t be much, unless the political bickery is strong enough and is definitely a big asset for the campaigners.

The Congress party has accused the Modi government of engaging in ‘crony capitalism’ by favoring certain businesses in government contracts. In response, the government has denied these accusations, asserting that it has not shown favoritism to companies and has instead focused on investing in welfare programs to improve the lives of the poor.

Now coming to the K-shaped recovery claim and inequality aspect, which is said to be the crux of Congress’ wealth redistribution idea.

More than political, isn’t it about inequality?

Rahul Gandhi’s plan may sound like a simple ‘Robin Hood’ scheme to take from the rich and give the poor, but the idea of wealth redistribution has been debated for quite some time. Historically central to communist revolutions, wealth redistribution is now discussed by economists due to rising income inequality.

Government policies already include basic redistributive principles, like progressive taxation where the rich pay more taxes, and subsidies or freebies for the poor, such as free food grains. However, there has been a call for more radical measures.

The World Inequality Lab reported that inequality in India has widened since the early 2000s, with the income and wealth share of the top 1% of the population rising to 22.6% and 40.1%, respectively, in 2022-23.

India’s top 1% income share is among the highest in the world, surpassing even South Africa, Brazil, and the US, according to the report.

Rajesh Shukla, MD-CEO, People’s Research on India’s Consumer Economy, wrote in ET editorial that since 1947, India has experienced significant economic growth, but the benefits have been unevenly distributed. Economic liberalisation brought new opportunities and wealth, but it also increased inequality. Recent economic disruptions, including the pandemic, have further exacerbated this trend.

Read Rajesh Shukla’s full article here

Some experts believe progressive taxation and increased social spending present alternative solutions to enhance economic equality. Wealth taxes like capital income taxation, net wealth taxation, and transfer taxation could generate additional tax revenue. This revenue could then be allocated towards investments in healthcare, education, and infrastructure.

But to be sure, India had previously implemented taxes targeting the wealthy, such as estate tax, wealth tax, and gift tax. However, these taxes were eventually abolished due to low collections and high administrative costs.

Did India’s previous experiments with wealth tax succeed?

PM Modi had said that concepts like wealth redistribution and wealth tax often don’t solve poverty but rather spread it out, making everyone equally poor. He described these ideas as disguised problems, not real solutions. “Would you keep working hard if the government took away your money in the name of redistribution?” he questioned.

PM Modi also said that wealth redistribution could discourage many people who are striving to lift themselves out of poverty with the government’s support.

Eventually, as India deals with the challenges of wealth inequality, the conversation keeps going. Even though political talk may calm down as election heat fades, the main problem stays, and it needs careful thought and strong action to make sure everyone has a fair shot at a better future.

Content Source: economictimes.indiatimes.com

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