TIOL - COB( WEB) - 954
JANUARY 09, 2025

By Shailendra Kumar, Founder Editor

RIDING on the coattails of political success of his closest 'buddy', the President-elect Donald Trump, the world's richest person, Elon Musk, has seen his net worth leapfrog by over USD 200 billion, in the recent weeks. His net worth has become almost double of the second in the global tally of billionaires - Jeff Bezos, whose net worth is close to USD 240 billion! As per Forbes, there are 2781 billionaires in the world - a huge jump from 2153 in 2019. What about millionaires? There are about 60 million of them in the world today, and this number is projected to spike to 86 million by 2027 as per UBS reckoning. Voila, only 3% of all wealth is owned by half of the global population! And the richest 0.5% possesses close to 26% of the global wealth today. As per the EU Tax Observatory reports, between 1987 and 2024, the average wealth of the top 0.0001% richest households globally jumped by 7% a year on average net of inflation - much quicker than the rate of 3% at which average wealth grew! All these studies are emblematic of the skyrocketing trend of acute income and wealth inequality in the world, which may spell fatal consequences for the global society as well as the global economy in the coming decades! Such extreme wealth has crystal-clear nexus with people having to spend more than they can earn! As a result, per household debt has been on the rise in the past decades!

What nourishes such an incendiary trend across the globe? Obviously, the existing tax system! First, faulty design and implementation of wealth tax or estate duty or death duty or inheritance tax have earned bad repute for these taxes, and legions of nations have discarded them for being poor tax gatherer. Right from the US to the UK to India, wealth tax in all variants has been dubbed as villainous and vile. Take the example of estate duty levied by the US. The exemption threshold is USD 27 million. Anything above this sum is taxed at 40%. It sounds dang simple! But estate tax receipts have not grown since 2000 albeit the wealth of richest Americans has quadrupled over the past decades! If tax receipts would have grown in lockstep with the wealth, the US would have garnered USD 120 billion in 2023! What has done lethal damage to the US treasury is the gradual reduction in the estate duty rate and, secondly, loopholes in the gift tax regime nudge taxpayers to deploy a complicated borrowing strategy to sidestep a federal gift tax limit. India is no exception. It had an old-fashioned wealth tax regime with many flaws. As a result, its annual revenue collection used to fall short of annual cost of collection! It was finally guillotined by the Modi government.

Last month, the globally renowned economist on income and wealth inequality, Dr Thomas Piketty, talked about the soaring income disparity in India at Delhi School of Economics in New Delhi. His prescription for the government is to tax the superrich (167 billionaires) for foresighted redistribution of wealth. He was of the view that India needs to raise more revenue to do justice to public services. He said that unless the government taxes the rich, it would not be able to convince the middle class to pay their dues. He said that a mere 2% wealth tax on the rich Indians can garner about 0.5% of the GDP - enough for education and health budgets. He cited the example of China where only 10% of population used to pay taxes about 40 years back. Today, above 75% pay taxes and income disparity exists only with narrow gaps! He said that India needs to begin with the very top. India-based Pikettians overwhelmingly support such views. Ironically, the Indian Income Tax Act does not define any threshold for High Net Worth Individuals (HNWIs) and Ultra-HNWIs. However, Knight Frank's 2024 report states that there are about 13300 UHNWIs in India, and it may spike close to 20,000 by 2028. The threshold reckoned for the study of UHNWIs was USD 30 million. What about HNWIs? It is USD one million, and their population is about four million. Another blaring pointer is the projected size of luxury goods market in India, which is going to grow from USD 8 bn to USD 14 bn by 2032!

Although the Indian political juggernauts are reluctant to tax the superrich but India was a party to a G20 Communique issued by Brazil, which has been pushing for a consensus to tax the superrich. Although it was left to individual member-country to decide but its virtues were neither disputed nor rebutted at the closed-door meetings, and the same is boldly explained in the IMF report on alternative options for revenue mobilisation. The G20 proposal talked about a new doorway to levy a 2% minimum wealth tax on billionaires. This proposal was designed to replicate the global minimum corporate tax rate. It would require all countries to enter into a global treaty. Meanwhile, the Tax Justice Network report states that a recent polling has revealed that an overwhelming 68% of adults across 17 G20 countries have favoured higher tax rates on wealthy persons. Amazingly, close to 75% of millionaires in G20 countries supported higher taxes on wealth and over 50% dubbed extreme wealth as a serious 'threat to democracy'! In view of such studies, India should not demur on the prospect of going for a superrich tax or wealth tax or inheritance tax. The only word of caution is not to create a class of exempt assets and keep the rate nominal to ensure higher compliance!

Let's now swirl to major lacunae in the global tax system. As per Tax Justice Network, the real flaw lies in the two-tier treatment of collected wealth and earned wealth. What are collected wealth - capital gains, rental income and dividends, which are globally taxed at far lower rates than earned wealth - salaries earned by workers. Secondly, collected wealth thrives faster than earned wealth. Interestingly, only half of the wealth today goes to people who work to eke out a living, and the other half is shovelled by the collected wealth. The superrich may work but their wealth comes from real estate empires and owning businesses and not from working for the empires. Substantiating such a hypothesis, the Tax Justice Network Report states that three out of five superrich in the Forbes' list earn barely one US dollar salaries and earn huge sums from the ownership of companies. Well known examples are Larry Elison, Mark Zuckerberg and hundreds more. In this case, billionaires pay taxes which are only half of what is paid by the rest of the society. And their wealth grows at twice the rate as that of the rest of the society! The baleful effects of such wealth accumulation are that such accumulated wealth is less productive - it predominantly goes towards speculative trading rather than manufacture of goods and services in the real economy. Secondly, it also exacerbates indebtness of non-rich households as it remains elusive for them.

In view of this study, the Tax Justice Network recommends that if the world adopts a Spanish feather-light wealth tax rate of 1.7% to 3.5% with higher exemption threshold and only on 0.5% of the households on specifically the upper crust of their wealth rather than all their wealth, the annual collections would be more than USD two trillion. The study suggests that it would raise revenue equivalent to 7% of the national budgets for all economies. The study also observes that previous tax reforms aimed at the superrich did not drive them in droves to relocate to other countries. Citing examples of Norway, Sweden and Denmark, it notes that only 0.01% of the richest relocated when such a tax reform was undertaken. Similarly, if the UK reforms its non-dom provisions, it may witness a migration rate of 0.02% to 3.2%.

The Study also points out that the levy of wealth tax would generate more than sufficient revenue to meet what the developing countries need to combat climate change. As per the Independent High Level Expert Group during COP27, the annual investments in climate action need to grow by USD 2.4 trillion annually by 2030 for developing countries minus China. Out of this, about USD 1.4 trillion is to be garnered from domestic sources, and about USD one trillion from external sources. About USD 2.1 trillion revenue can be collected by simply replicating Spain's wealth tax model. Indeed, such a study is worth studying with critical eyes by the Global South which cannot depend on donations alone, from the rich world to the climate fund, and need to mobilise resources internally for rapid energy transition. I strongly feel that the UN tax convention which is being negotiated, should vehemently recommend the levy of wealth tax and also a fresh approach to tax 'collected wealth' which inevitably contributes to the deepening wealth inequality which may engender may social ill-effects in the years to come!