Economy
Mint Primer | Redistribution: Can it benefit India’s poor?
Summary
- Researchers say that the wealth gap will not close on its own and needs specific policy interventions, adding that wealth of the rich must also be taxed
Theoretically, redistribution of wealth is a good way to bring down economic inequality. But implementing it is fraught with challenges. As debate on the topic rages, Mint looks at the concept, the pros and cons of implementing it and the outcomes of past attempts.
What is redistribution of wealth?
It is a process by which income and wealth is transferred from the rich to the poor through steps such as taxes, land reforms and welfare measures. This is done to bridge economic inequality in the system. This subject typically comes to the fore when inequality widens significantly as is the case today. A study by the Organization of Economic Co-operation and Development has revealed that the wealthiest 10% of households hold 52% of the total wealth while the least wealthy 60% hold just 12% across 38 member countries. Economists such as Thomas Piketty have called for greater redistribution of wealth.
Why is it a hot topic today?
The Congress election manifesto promises a nationwide socio-economic and caste census to strengthen affirmative action for bridging inequality. While this statement in itself is benign, speeches of its leaders have hinted at a greater redistribution of wealth. Rahul Gandhi has talked of “historic assignment to distribute wealth of India, jobs and other welfare schemes" post census. Sam Pitroda has cited inheritance tax as a tool to redistribute wealth. Bharatiya Janata Party has portrayed this idea as an attempt by the Congress Party to grab people’s wealth and redistribute it, especially to minorities.
Is redistribution a new concept?
No—it’s already in play. Those earning more pay higher tax. The tax revenue is used to fund welfare measures, subsidies and direct cash transfers to the needy. State governments levy property tax. In the past, India had estate duty (a form of inheritance tax), wealth tax and gift tax. They were abolished as the cost of administering them was more than revenue generated.
Is there a need for more redistribution?
The wealth gap has widened in India in the recent years. According to a study published by The World Inequality Lab, richest 1% of Indians now own as much as 40% of the country’s wealth. Researchers say that this gap will not close on its own and needs specific policy interventions such as a super tax on billionaires and millionaires. They also say, their income apart, wealth of the rich must also be taxed. According to them this is needed as wealthy people are not paying their fair share of taxes.
What do critics of the idea say?
Redistribution of wealth, they argue, will smother innovation and hit productivity eventually causing the economy to slow. Inequality is inevitable in a growing economy as holders of capital reap the maximum benefit. Wealth creators contribute to economic prosperity and should not be penalized. Also, inequality is not a major concern as long as people’s lives improve. Zimbabwe and Venezuela tried large scale redistribution and failed. India once had income tax rates of 97.75% plus wealth tax but failed to end poverty, they say.
