Taxing billionaires in an unequal society

In an era marked by staggering inequality, the question of taxing billionaires has become a focal point of debate, sparking intense discussions across political, economic, and social spheres. With the chasm between the ultra-rich and the rest of society widening at an alarming pace, many argue that taxing billionaires represents a crucial step towards rectifying this imbalance. Advocates contend that such a measure not only serves as a means of generating revenue for public goods and services but also as a mechanism for redistributing wealth and addressing systemic disparities. However, detractors raise concerns about the potential impacts on innovation, entrepreneurship, and economic growth, warning of unintended consequences that could stifle prosperity. As societies grapple with the complexities of wealth distribution and social equity, the issue of taxing billionaires stands at the intersection of economic policy and moral imperative, reflecting broader questions about justice, fairness, and the future of societal well-being.

Tags: GS Paper – 1 Society- Issues Relating to Poverty – GS Paper – 3- Economy- Tax report – Wealth Tax- Inclusive Growth

Prelims: Wealth Tax, Global Tax Evasion Report 2024, Tax Evasion Kuznets curve, World Inequality Lab and Henley Private Wealth Migration Report.

Mains: Rising Economic Inequalities and Wealth Tax- Need, Significance and Challenges, Call for tax on billionaires, Recent Economic Growth Trajectory of India,Inclusive Growth

Table of Contents

Context:

The European Union Tax Observatory recently released the ‘Global Tax Evasion Report 2024,’ focusing on key issues such as tax evasion, the Global Minimum Tax (GMT) for billionaires, and anti-evasion measures.
Economic Inequality in India is worse than the colonial period, with the top 1% owning 40% of India’s wealth and taking away 22.6% of national income every year.

Tax Evasion:

Tax evasion is the unlawful practice of avoiding payment of owed taxes to the government.
This involves underreporting income, exaggerating deductions, concealing money in offshore accounts, or employing fraudulent methods to decrease tax liability.
It constitutes a deliberate and illegal effort to diminish tax responsibilities by distorting or hiding financial details.

The International Reforms to Combat Tax Evasion:

International reforms to combat tax evasion include the implementation of a Global Minimum Tax (GMT) and the Automatic Exchange of Information. GMT establishes a standard minimum tax rate on corporate income globally.
The OECD proposed a 15% corporate minimum tax on large multinationals’ foreign profits, estimated to generate USD 150 billion in new annual tax revenues.
A coalition of 136 countries, including India, agreed on a 15% minimum global tax rate for multinational corporations in October 2021, aiming to prevent tax avoidance and base erosion by discouraging tax competition through lower rates.
The Automatic Exchange of Information, initiated in 2017, targets offshore tax evasion by affluent individuals.

The Key Highlights of the Report:

Challenges in Addressing Offshore Tax Evasion:

While offshore tax evasion has decreased over the past decade, with only 25% of wealth in global tax havens remaining untaxed compared to 10% in 2013, obstacles persist.
These include non-compliance by offshore financial institutions and limitations in automatic exchange of bank information.

Tax Rates Equivalent to 0%:

Global billionaires typically enjoy effective tax rates ranging from 0% to 0.5% of their wealth, facilitated by the widespread use of shell companies to evade income taxation.
US billionaires face an effective tax rate of approximately 0.5% of their wealth, while French billionaires pay no taxes.

Profit Shifting by MNCs:

Multinational corporations (MNCs) have shifted approximately USD 1 trillion to tax havens in 2022, representing around 35% of their profits earned outside their headquarters countries.
The report highlights concerns over the practice of “Greenwashing the Global Minimum Tax,” where MNCs leverage ‘green’ tax credits for low carbon transition to reduce their tax rates well below the minimum threshold of 15%.

Importance of Policy Choices:

Tax evasion, wealth concealment, and profit shifting to tax havens stem from policy decisions or the lack thereof, rather than natural phenomena.
There is a crucial need to assess the repercussions of tax policies and implement enhancements for the establishment of sustainable tax systems.

Recommendations:

Advocate for a global minimum tax on billionaires, proposing a rate of 2% of their wealth. Implement mechanisms to tax long-term residents who relocate to low-tax countries.
This measure is crucial for governments globally to boost revenue, tackle wealth inequality, and finance vital services such as education, healthcare, and infrastructure.
Reform the international agreement on minimum corporate taxation to establish a rate of 25% and eliminate loopholes fostering tax competition.
Implement unilateral measures to recover some tax deficits from multinational companies and billionaires if global agreements fail to address these issues adequately.
Progress towards establishing a Global Asset Registry to enhance efforts against tax evasion.
Strengthen the enforcement of economic substance and anti-abuse rules to prevent tax avoidance and evasion effectively.

What is Wealth Tax?

Wealth tax is categorised as a direct tax, targeting individual assets like cash, shares, and property.
India’s Wealth Tax Act, established in 1957, imposed a 1% tax on earnings exceeding Rs 30 lakh per year. However, due to ineffective implementation, the Act was repealed in 2015.
India has seen a rise in billionaires, with 94 new additions, reaching a total of 271. A study by Thomas Piketty highlights extreme wealth disparity in India, indicating the richest 1% hold a disproportionately large share of wealth..
The EU Tax Observatory, a European tax think tank, has proposed a global minimum tax of 2% on billionaires’ wealth, potentially generating approximately $250 billion annually.

Arguments in Favour of Wealth Tax:

Reduces Wealth Gap: A wealth tax reduces the wealth gap and creates a fairer society.
Contribution to Society: The rich should pay more for benefiting from society’s resources.
Funds Public Goods: Wealth tax revenue can fund public goods and services.
Encourages Investment: A wealth tax encourages productive investment over hoarding.

Arguments Against Wealth Tax:

Flight of High Net Worth Individuals: Implementing a wealth tax may prompt high-net-worth individuals to leave the country.
According to the Henley Private Wealth Migration Report of 2023, India ranks second globally in the outflow of high net worth individuals, following only China, with a net loss of 13,500 individuals.
Compliance Costs: India abolished its wealth tax in 2015 due to the burden of litigation and compliance costs associated with its enforcement.
Asset Valuation Disputes: Difficulty in accurately valuing assets often results in disputes and legal challenges, complicating the implementation of a wealth tax.
Harms to Consumption and Employment: Imposing a wealth tax could potentially dampen consumption and employment among middle and upper-class individuals.
Existing High Taxes: The super-rich are already subject to a significant tax burden, with a tax rate of 42.74% plus a 2% surcharge.
Indirect Tax Efficiency: Indirect taxes are generally perceived as more efficient due to lower compliance burdens associated with direct taxes.

The difference between income and wealth taxes lies in what they target and how they are assessed:

Wealth Taxes:

Target: Wealth taxes are imposed on the total net wealth owned by a taxpayer, known as the wealth stock.
Assessment: They are assessed based on the accumulated wealth over time rather than the income generated within a specific period.
Example: Estate taxes, gift taxes, and inheritance taxes are examples of wealth taxes. These taxes are typically levied on a one-time or infrequent basis.

Income Taxes:

Target: Income taxes are levied on the flow of income generated from the wealth stock within a specific period.
Assessment: They are assessed based on the earnings or income received by individuals or entities over a designated period, such as a fiscal year.
Example: Payroll taxes, capital gains taxes, and corporate income taxes are examples of income taxes. These taxes are recurrent and calculated based on the income earned during a specified period.

The Government Measures to Curb Tax Evasion:

E-Invoicing: E-Invoicing is a digital system that aims to curb tax evasion by ensuring the authenticity of invoices and preventing underreporting of sales transactions. It requires businesses to generate invoices through a government-approved platform, enabling real-time reporting of transactions to tax authorities.
The Fugitive Economic Offenders Act, 2018: The Fugitive Economic Offenders Act, 2018, is legislation enacted to deter economic offenders from fleeing the country to evade prosecution. It allows for the confiscation of properties and assets of individuals declared as fugitive economic offenders.
The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015: The Black Money Act, 2015, targets individuals who have undisclosed foreign income and assets to evade taxes. It imposes stringent penalties and tax liabilities on such individuals, aiming to deter the hoarding of illicit wealth abroad.
Prevention of Money Laundering Act, 2002: The Prevention of Money Laundering Act, 2002, is legislation designed to combat money laundering and the financing of terrorism. It requires financial institutions to implement robust anti-money laundering measures and report suspicious transactions to authorities.

UPSC Civil Services Examination, Previous Year Question (PYQ)

Q:1 The term ‘Base Erosion and Profit Shifting’ is sometimes seen in the news in the context of (2016)

(a) mining operation by multinational companies in resource-rich but backward areas

(b) curbing of the tax evasion by multinational companies

(d) lack of consideration of environmental costs in the planning and implementation of developmental projects

Ans: (b)

Q:2 In the context of any country, which one of the following would be considered as part of its social capital? (2019)

(a) The proportion of literates in the population

(b) The stock of its buildings, other infrastructure and machines

(d) The level of mutual trust and harmony in the society

Ans: (d)

Source: (IE)

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Taxing billionaires in an unequal society – UPSC