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Issue 12 Issue 13

It is the ‘Tax-the-Rich’ hour!

On 31st March 2021, The Guardian reported that New Zealand was raising its top rate tax for the country’s highest earners to 39% and also raising its minimum wage to $20 an hour. On 9th April, the New York Times reported that the budget for the coming fiscal year includes a long-overdue increment in the income-tax cuts of people making more than $1.078 million. Back in April of 2020, Landais, Saez and Zucman proposed a Progressive European wealth tax to fund Europe’s COVID response. However, the idea of taxing the rich started reappearing in mainstream media a little before the pandemic itself hit. In the recent US Presidential race, two candidates, namely Bernie Sanders and Elizabeth Warren, proposed two separate models of progressive wealth taxation as a policy suggestion in their campaigns. These models were also designed by UC Berkeley Economists Emmanuel Saez and Gabriel Zucman. But despite Europe’s failure with the wealth taxation system, one may ask the very obvious question, ‘Why expend time, effort and resources on a failed policy?’

The progressive wealth tax model presented by Saez & Zucman is widely lauded for its striking approach towards countering the flaws persistent in the European system and coming up with a more effective system suitable for the USA. They argue that a wealth tax is a potentially more powerful tool than income, estate, or corporate tax when it comes to addressing the issue of wealth concentration. This is because the wealth tax goes after the stock rather than the flow, i.e., it does not target the annual income, but rather the accumulated wealth of the individuals. The two striking features of their model are that a) they propose a fairly high threshold, beyond which wealth will be taxed, which ensures that it doesn’t lead to the problems of illiquidity (as was the case in many European countries) and b) they can find ways to counter tax evasion, which was one of the main reasons behind the failure of European countries’ wealth taxation systems. They argue that since the USA’s taxation system is citizenship-based, it makes the USA’s system much less vulnerable to mobility threats than other countries.

One of the major contentions against any sort of wealth tax or taxation targeted on the rich is that it disincentivizes them from working hard and/or innovating. However, Smith et al., argues that most top earners derive their income from human capital rather than financial capital. And while credit constraints could perhaps be a problem, a wealth taxation model with a high exemption threshold like the one presented by Saez & Zucman, by definition, spares the credit constraint. Moreover, they also argue that it is the established businesses that gate-keep innovation in their industries by fighting any new competition in order to maintain their dominant position. Moreover, it has a significant impact on income inequality, because wealth taxation prevents maintenance and growth of people’s existing accumulated wealth, and specifically reduces consumption inequality.

Although wealth taxation may seem like a good idea on a solely altruistic basis as well, it might actually be very instrumental in poverty targeting policies, especially for countries that face a severe lack of resources, like developing countries. In fact, a targeted and strictly enforced wealth taxation model could be very helpful for a country like India. Saez & Zucman argue that tax evasion depends only on the design of the taxation system and the strength of enforcement, both of which are active policy choices. The long-run revenue-maximizing wealth tax rate according to their model is about 6.25%, which they categorize as a fairly high rate. According to S Subramaniam, if India’s top richest 935 families’ wealth was taxed at a flat rate of 4%, it would be able to generate revenue that is equivalent to 1% of India’s GDP. This money could then be used to fund more targeted schemes such as a Quasi-Universal Basic Income (QUBI). There could be various QUBIs like ones that provide a guaranteed income to women or one that seeks to provide a basic income to people that have lost their jobs owing to the pandemic, or even to automation.

It is certainly no coincidence that policies targeted at taxing the rich are making a comeback, it has taken relentless effort on part of activists around the globe to bring this up to the forefront. The New York Times reports, about the increment in income taxation on rich in New York, that: “In January, 170 grassroots organizations along with dozens of legislators formed the Invest in Our New York coalition, which in the subsequent months made close to one million calls to lawmakers, sent more than 260,000 texts to residents across the state, held 100 teach-ins and placed hanging cards declaring “Tax the Rich” on 120,000 doors.” And while the debate about taxing the rich has been around for long enough, it does seem like the world is finally ready to embrace radical measures to reduce inequality and make the world a more equal place to live in (at least in economic terms).

This article has been republished from LiveWire with permission of the author.

Ishita is currently pursuing her postgraduate diploma in Entrepreneurial Leadership & Strategy, and has recently completed her undergraduate studies in Economics & Finance, from Ashoka University. When she’s not stressing about the next thing and over-planning her coming activities, she can be found discussing issues related to politics, managing her page @angrybrowngal.

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