‘India can grow even faster with less inequality’: Economist Thomas Piketty

Economist Thomas Piketty is known for his work on inequality. In India, to speak at the Delhi School of Economics and think tank RIS, he makes the case for the govt to levy 2% tax on the wealth of the ultra-rich and expand the tax base as the country has the highest level of inequality, next only to South Africa. Excerpts from an interview with TOI’s Sidhartha & Surojit Gupta:
Your studies suggest that inequality has increased post-1991 in India. But there seems to be a much bigger middle class, poverty is not as stark as it was 35 years ago. While the gap between the top 1% and bottom 10% has increased, aren’t more people better off?
Thomas Piketty: My general point is that India could do even better with less inequality. I’m not saying that everything is going wrong in India. India is making progress to reduce poverty. My point is that we don’t need this kind of extreme inequality level that we find in India. In fact, we could grow even faster, reduce poverty even more with less inequality. The level of inequality we see in India in terms of share going to the bottom 50%, share going to the top 10%, and share going to top 1% puts India almost at the very top of the scale of the world. We have a few countries like South Africa, which do even worse. Whether I look at today’s rich countries, the European countries or even the US, which is more unequal than Europe, is less unequal than India and has become less unequal at quite early stages of development through public policies, through progressive taxation.
Fifty years ago, China was not richer than India. It has become richer than India. A part of the reason why it has become richer than India is that it has been somewhat less unequal, at least in socio-economic terms; in political terms, that’s another story, of course.
You’ve talked about tackling inequality by taxing the super-rich. But it’s a very difficult process in countries like India. What other measures can be taken and how do you convince the wealthy to give more?
■ Taxation is always complicated because everybody would like to pay less tax. But the level of tax revenue in India is 13-14% of GDP, which is not very large. If you want to fund the police force, the justice system, infrastructure, education, everything with 13-14% of GDP, what you end up doing is that you’re not paying the people very well, you’re not funding anything very well, and you don’t get the quality of public services.
You have less than 10% of the population paying the income tax in India. You have to say as incomes go up and as you have large real growth of income each year, this percentage should increase a little bit. Forty years ago, 10% of the population was paying income tax in China, now it’s 70-80% of the population. So, you get more tax revenue. And if you want this to be acceptable for the middle class and the upper middle class, then of course you need to start with the very top.
If they have the feeling that people at the very top can evade taxes and we have a kind of crony capitalism with top billionaires completely evading taxes, it’s difficult to do it. The Indian govt could also do things in India for greater tax justice, it can be a more powerful voice in international discussion about billionaire taxation. Brazil played the role in the G20 summit to push for the Global South. But why was India passive? I want India to push for ambitious redistribution including taxing the Indian billionaires.
In India, the top rate of income tax works out to some 43%. Where do we go from here? Besides, a lot of the rich are non-residents who do not pay taxes here. How do you address that?
■ For the 43% tax rate what matters is to make it effective for people at the very top. If you look at top billionaires, the income they will report in their income tax return is going to be like 0.01% of the wealth; you can tax it at 90% if you want, but this is irrelevant.
The issue is to tax the wealthy. What we have computed in our work is that just a 2% wealth tax on India’s super rich (167 billionaires) will raise very significant revenue (0.5% of the national income) when you compare it to the education budget, health budget. These people can live anywhere but they have made their fortunes in India, using Indian infrastructure, using the Indian education system, using the Indian legal system, sometimes using connections with govt.
At some point, the govt of India is perfectly legitimate to say, for instance, if you want to live somewhere else and you have spent the first 50 years of your life in India where you accumulated your wealth, you will still pay in proportion to the number of years you spent in India. If you start with the assumption that the very wealthy can get away, how do you want to convince the rest of the population to pay more tax? The govt of India has the capability to make its decision respected. It’s a matter of political will.
India has done a lot on financial inclusion in recent years. Is this another way of trying to attack inequality?
■ It can be useful, but it’s not enough. Access to credit is important, but you also want good quality basic public services, infrastructure, education, health.
Will something like universal basic income work in a country like India?
■ It can be useful, but it’s not the magic bullet. That’s not going to replace high quality public services. That’s not going to replace access to credit. But this is all part of the solution.
Will a wider public holding of these family-owned businesses reduce concentration of wealth?
■ In some cases it can make sense. I also believe in more worker involvement in these companies. Maybe, one day, India will adopt some form of the German, Swedish company management system where an elected representative of workers sits in the board.
You’re not a believer of the trickle-down theory?
■ Well, with this level of inequality, no.