Why Income Tax Will Stay

Every year, before the annual budget is presented, suggestions are made to scrapthe income tax paid by individuals. The economist/politician Subramanian Swamy has also said so in the past. The logic typically offered is that the individual income tax forms a very small part of the total taxes collected by the government, and hence, it should be scrapped.

Let’s look at Table 1, which

Table 1:

Assessment yearIndividual income tax as a proportion of total taxes collected by the governmentIndividual income tax as a proportion of GDP
2012-201312.67%1.24%
2013-201413.52%1.38%
2014-201516.86%1.68%
2015-201615.18%1.50%

Source: Author calculations on data from Incometaxindia.gov.in.Table 1 has data up to assessment year 2015-2016. Income tax for the money earned in the financial year 2014-2015, would have been paid in the assessment year 2015-2016. The budget documents of the government of India do not list out the total income tax paid by individuals, separately. Hence, the latest numbers for the total income tax paid by individuals, isn’t available in the public domain.

These numbers are separately declared by the income tax department, on a non-regular basis.

What does Table 1 tell us? It tells us that the income tax paid by individuals, forms a small portion of the total tax collected by the government, during any given year. This is the logic offered by those who say that individual income tax needs to be scrapped. More than this, once the taxes are scrapped, people are likely to spend the money not paid in the form of income tax, in various ways. They might decide to go on a holiday or redo the house or go out and eat more often.

Hence, when this extra spending happens, the incomes of many other people will go up and they are also likely to spend more as well. Thus, the multiplier effect will work. This will ultimately benefit businesses, which will make higher profits, and hence, pay more income tax on their profits. Further, the government is also likely to collect more indirect tax. And net net, scrapping income tax for individuals won’t make much of a difference, for the government.

Also, this is likely to force the government to cut down on frivolous expenditure. It is also likely to force the government to get rid of many loss-incurring public-sector enterprises, which continue to bleed. Basically, it will force the government to cut down on what I have been calling Big Government in many of my previous pieces.

All this makes perfect sense, but in theory. Now let’s take a look at Table 2, which basically lists out individual income tax in rupee terms.

Table 2:

Assessment yearTotal individual income tax (in Rs crore)
2012-20131,12,112
2013-20141,39,500
2014-20151,91,208
2015-20161,88,031

Source: Incometaxindia.gov.in.While, income tax from individuals, might look very small as a proportion of total taxes collected by the government, but the absolute amounts on their own are not small at all. In fact, let’s take a look at the assessment year 2015-2016. The total income tax from individuals during this year stands at Rs 1,88,031 crore. This money is enough to finance the budget of many departments of the government of India. And this is money that the government is collecting for sure.

If the government scraps this, where will it get this money from? By now, the income tax paid by individuals must have easily touched Rs 2,50,000 crore. As supporters for scrapping individual income tax point out, the government is likely to earn more money from corporations paying higher income tax on their higher profits. Also, it is likely to collect more indirect tax as people end up spending more money.

The word to mark here is likely. No government is going to want to take such a big risk. Every government likes some amount of certainty when it comes to the taxes that it collects. Also, it has been suggested that if scrapping income tax for individuals is not possible, income tax can be done away at the lower levels of income.

This is where things get even more interesting. Take a look at Table 3. Table 3 basically plots the total taxes paid by individuals paying an income tax of greater than zero but lower than and equal to Rs 1,50,000. This is the lowest bracket for which the income tax department provides data.

Table 3:

Assessment yearTotal income tax paid by individuals paying an income tax of > 0 and <=1,50,000 (in Rs crore)Total individual income tax (in Rs crore)Proportion of total income tax
2012-201323,5511,12,11221.01%
2013-201437,1071,39,50026.60%
2014-201543,9641,91,20822.99%
2015-201644,6151,88,03123.73%

Source: Author calculations on data from Incometaxindia.gov.in.While, the individuals paying an income tax of less than or equal to Rs 1,50,000, pay a very low average income tax every year (around Rs 25,000 in assessment year 2015-2016), on the whole it adds up to a substantial amount. This is what Professor CK Prahalad called the fortune at the bottom of the pyramid. For assessment year 2015-2016, it amounted to a total of Rs 44,615 crore, which would have again enough to finance the budgets of several government departments.

Also, at lower levels, the idea is to get people to start paying income tax. Once they start doing that, they are more likely to continue doing it, in the years to come. Further, given that a major portion of these taxes are directly cut from salaries by companies and handed over to the government, the government has to do very little in order to collect this money. Hence, there is no reason for the government to scrap individual income tax, though theoretically it might make immense sense.

Also, the things that the government will have to do if it scraps individual income tax would require much more work than it is currently used to. And we all like to take the easy way out.

The column originally appeared on Equitymaster on January 16, 2018.

0.16% of India’s Population Pays 76% of Income Tax Paid by Individuals

rupee

A couple of days back, the ministry of finance published income tax data for assessment year 2015-2016. The income tax returns for the income earned during the financial year 2014-2015 were filed in the assessment year 2015-2016.

I had written a similar piece last year based on data published for the assessment ears 2013-2014 and 2014-2015. This piece is an extension of that.

We now have data for four assessment years starting with 2012-2013 and up to 2015-2016, and it makes for an interesting reading. Let’s start with Table 1.

Table 1:

Assessment yearTotal number of returns filed by individualsTotal number of individuals paying income tax
2012-20132,87,66,2581,25,18,636
2013-20143,35,85,2941,66,47,061
2014-20153,65,13,0341,90,97,559
2015-20164,07,39,7992,05,72,727

Source: incometaxindia.gov.in 

What does Table 1 tell us? It tells us very clearly that both the number of tax returns filed by individuals as well as the number of people paying tax has been growing over the years.

While, the total number of returns being filed by individuals has risen at 12.3 per cent per year, the total number of individuals paying income tax has risen at the rate of 18 per cent per year and that is clearly good news.

Now let’s take a look at the proportion of people filing income tax returns, who also pay income tax (in Table 2).

Table 2:

Assessment yearTotal number of returns filed by individualsTotal number of individuals paying income taxProportion of people filing income tax returns who also pay income tax
2012-20132,87,66,2581,25,18,63643.52%
2013-20143,35,85,2941,66,47,06149.57%
2014-20153,65,13,0341,90,97,55952.30%
2015-20164,07,39,7992,05,72,72750.50%

Source: incometaxindia.gov.in 

Table 2 clearly tells us that only half of people filing income tax returns pay income tax. This ratio is way too low. What this basically means is that the current system is so structured that it is generating a lot of work for chartered accountants and others who are in the business of filing income tax returns.

How do things look vis a vis overall population? Let’s take a look at Table 3.

Table 3:

Assessment yearTotal number of returns filed by individuals (in Crore)PopulationProportion of population filing income tax returns
(in Crore)*
2012-20132.88126.42.28%
2013-20143.36127.92.63%
2014-20153.65129.52.82%
2015-20164.07130.93.11%

* Population data sourced from World Bank.
Source: Author calculations on data sourced from incometaxindia.gov.in 

Table 3 tells us that only 3.1 per cent of the country’s population actually files income tax returns. This figure has constantly been improving. Now let’s take a look at what proportion of the country’s population which actually pays tax in Table 4.

Table 4:

Assessment yearTotal number of individuals paying income tax (in Crore)Population (in Crore)*Proportion of population paying income tax
2012-20131.25126.40.99%
2013-20141.66127.91.30%
2014-20151.91129.51.47%
2015-20162.06130.91.57%

* Population data sourced from World Bank.
Source: Author calculations on data sourced from incometaxindia.gov.in 

Hence, around 1.57 per cent of the country’s population paid any income tax in 2015-2016. While a figure of 1.57 per cent sounds atrociously low on the whole, things do not turn out as bad, once we take other factors into account.

Agricultural income is tax free. A bulk of country’s workforce is dependent on agriculture for its livelihood. The labour force participation rate of women in case of India is very low, i.e., most women don’t work for a living. Over and above this, there are the young and the old, who aren’t making any money or enough money for that matter. And India is a young country with a bulk of its population being under 25 years or age. Once we adjust for all these factors the numbers in Table 3 and Table 4 do not look so bad.

Having said that, there are inconsistencies which need to be pointed out. There were only 57,399 individuals who have a returned income of greater than Rs 1 crore. Also, there were only 1,68,318 individuals with a returned income of greater than Rs 50 lakh in the assessment year 2015-2016 (Returned Income is the total income after chapter VI-A deduction and deductions u/s 10A/10AA (wherever applicable)). This is a tad difficult to believe when we look at other data points like the number of luxury cars that Indians buy every year, the number of Indians going abroad etc. Hence, there is a proportion of the population which is not declaring its taxes properly.

Of the 2.06 crore individuals who paid tax, a bulk of taxpayers (around 1.85 crore) paid a tax of less than Rs 1.5 lakh, during the assessment year 2015-2016. Take a look at Table 5.

Table 5: Tax payable less than or equal to Rs 1.5 lakh

Assessment yearNumber of individualsTotal tax paid (in Rs Crore)Average tax paid (in Rs)
2012-20131,11,28,41923,44621,069
2013-2014150,64.99737,10724.631
2014-20151,71,79,47443,96425,591
2015-20161,84,87,38744,61524,133

Source: Author calculations on data sourced from incometaxindia.gov.in 

So, the average tax paid by those paying a tax of less than Rs 1.5 lakh was Rs 24,133 during the assessment year 2015-2016. This basically means that the bulk of the tax is being paid by those paying a tax of greater than Rs 1.5 lakh. Let’s take a look at Table 6.

Table 6: Tax payable greater than Rs 1.5 lakh

Assessment yearNumber of individualsTax paid (in Rs Crore)Average tax paid (in Rs)
2012-201313,90,21791,1096,55,358
2013-201415,82,0641,02,3936,47,211
2014-201519,18,0851,47,2447,67,661
2015-201620,85,3401,43,4166,87,734

Source: Author calculations on data from www.incometaxindia.gov.in 

Now compare Table 5 with Table 6 and it is more or less clear that those paying a tax of greater than Rs 1.5 lakh during the assessment year 2015-2016, even though they are very small in number, paid the bulk of the individual income tax. Now let’s take a look at Table 7.

Table 7:

Assessment yearTotal tax paid by individualsTotal tax paid by individuals paying more than Rs 1.5 lakh tax per yearProportion
2012-20131,14,55591,10979.50%
2013-20141,39,5001,02,39373.40%
2014-20151,91,2081,47,24477%
2015-20161,88,0311,43,41676.30%

Source: Author calculations on data from www.incometaxindia.gov.in 

Hence, those paying an income tax of greater than Rs 1.5 lakh, paid 76.3 per cent of the income tax paid by individuals during the assessment year 2015-2016. It would be interesting to see what proportion of the population do they make up for. Let’s look at Table 8.

Table 8:

Assessment yearNumber of individuals who paid an income tax of greater than Rs 1.5 lakhPopulation (in Crore)Proportion of populationProportion of income tax paid by individuals
2012-201313,90,217126.40.11%79.50%
2013-201415,82,064127.90.12%73.40%
2014-201519,18,085129.50.15%77%
2015-201620,85,340130.90.16%76.30%

Source: Author calculations on data from www.incometaxindia.gov.in 

Hence, in the assessment year 2015-2016, 0.16 per cent of the population paid 76.3 per cent i.e. more than three-fourths of the income tax collected from individuals. Indeed, this is worrying. But what is more worrying is that India had only 1,68,318 individuals with an income of greater than Rs 50 lakh in the assessment year 2015-2016. This just doesn’t sound right.

The column was originally published on December 22, 2017.

What the Media Did Not Tell You About the Black Money Scheme Part 2

rupee

Note: This piece is similar to the one I wrote yesterday. It’s just a much better way of expressing the same thing. Ideally, this is the piece I should have written yesterday. But sometimes one does end up taking a longer route to arrive at the same destination.

Human beings have a habit of looking at absolute values and ignoring the denominator. Economists refer to this tendency as the denominator neglect.

The denominator neglect has been at full show in case of the Income Declaration Scheme which came to a close on September 30, 2016. The scheme had been in operation since June 1,2016. It offered people who had black money within the country to declare it to the government, pay a tax of 45 per cent on it and become a part of the system.

Black money or unaccounted or hidden wealth, is essentially income that has been earned over the years, but on which taxes have not been paid.

The government of India got declarations of Rs 65,250 crore of black money under the scheme This money will be taxed at the rate of 45 per cent. It means collections of Rs 29,362 crore for the government.

The scheme has been declared to be a huge success by the government as well as the media. The government press release announcing the black money declarations said that there has been “a tremendous response from the general public, especially in the last two months”.

The media led by The Times of India went to town saying that the collections had been three times bigger than the collections of the Voluntary Disclosure of Income Scheme(VDIS) of 1997, the last black money declaration scheme that the government had launched.

The total amount of black money declared in VDIS 1997 had stood at Rs 33,000 crore. The corporates had to pay a tax of 35 per cent on the black money declared whereas others (primarily individuals) had to pay a tax of 30 per cent. This led to a collection of around Rs 10,000 crore for the government.

The collections in the Income Declaration Scheme of 2016 are expected to be Rs29,362 crore or around Rs 30,000 crore. This is three times bigger than the 1997 number or so the media seems to have concluded.

The trouble is this is wrong. What the media hasn’t taken into account is the denominator or the size of the Indian economy, which has grown significantly bigger in the last two decades. The nominal gross domestic product(GDP) at current prices, a measure of the size of the economy, in 1996-1997 (the financial year before the VDIS 1997 scheme) was Rs 13.02 lakh crore. The total tax collected by the government in VDIS 1997 amounted to around Rs 10,000 crore. This was 0.77 per cent of the GDP.

The nominal GDP at current prices in 2015-2016 (the financial year before the Income Declaration Scheme of 2016) was Rs 135.76 lakh crore. This is 10.4 times more than the GDP in 1996-1997. Hence, the size of the economy is 10.4 times bigger, though the tax collected has grown only three times.

The tax the government expects to collect from the Income Declaration Scheme of 2016, is Rs 29,362 crore. This amounts to 0.22 per cent of the 2015-2016 GDP.

This is significantly lower than the tax collected in VDIS 1997. The media obviously did not take the size of the Indian economy into account before going to town about the success of the scheme. The denominator neglect was at play.

One reason for lower collections in the 2016 scheme lies in the fact that the rate of tax to be paid is 45 per cent. In the VDIS of 1997, it was 30 per cent or 35 per cent. Of course, more people are likely to declare black money at a lower rate of tax. But even after taking this into account, the difference between 0.77 per cent of the GDP and 0.22 per cent of the GDP, is fairly significant.

In fact, if the idea was to ignore the size of the Indian economy, then the media could have come up with an even better result. Instead of taking the VDIS of 1997 and saying that the tax collected in the Income Declaration Scheme of 2016, will be three times bigger, it could have taken the Voluntary Disclosure Scheme of 1975.

The total black money disclosure in case of this scheme was Rs 738 crore and the total tax collected stood at Rs 241 crore. The total tax expected to be collected under the Income Declaration Scheme of 2016 is Rs 29,362 crore, which is 122 times bigger.

The point being that even though the government has managed to collect some reasonable amount of tax under the Income Declaration Scheme of 2016, it is nowhere as significant as it is being made out to be.

Postscript: The Business Standard reports only 15% of black money declarants came in on their own. If the remaining 85% were forced to declare black money, why is there the need for amnesty schemes like the Income Declaration Scheme?

This also tells us that the IT department knows who the black money wallahs are. Business Standard reports that the IT department sent letters to 7 lakh possible evaders asking them to avail of the Income Disclosure Scheme. Why is there a need for amnesty schemes to do something like this? Why can’t such things be done during the normal course of things?

Of course, this is the benefit of hindsight. But there are lessons to be learnt here.

The column originally appeared in Vivek Kaul’s Diary on October 4, 2016

When It Comes to Taxes, the Fortune is at the Bottom of the Pyramid

rupee

Sometime back the Income Tax department released some detailed data about the income tax returns filed during the assessment year 2012-2013. The income tax returns for the income earned during the financial year 2011-2012 were filed during the assessment year 2012-2013. The department released some other data points as well.

I had hoped I won’t write anymore columns around the data, but then that is not how things have turned out to be.

One of the interesting data points that I wrote extensively about was that in the assessment year 2012-2013, only around 2.88 crore individuals filed income tax returns. Of this number, around 1.62 crore did not pay any income tax. Only the remaining 1.26 crore individuals paid some amount of tax.

Of this number, around 1.11 crore paid a total amount of income tax upto Rs 1.5 lakh. The average income tax paid by these individuals was at around Rs 21,068. Of course, the median amount of income tax paid would be even lower.

The interesting thing is that even though the average income tax paid by these individuals was low, the total income tax paid, added up to a substantial Rs 23,446 crore. This was by far the highest amount paid by any category of taxpayers.

The next highest amount of tax was collected from individuals who paid income tax in the range of Rs 5.5 lakh to Rs 9.5 lakh. Around 1.79 lakh individuals fell in this category and paid a total income tax of Rs 12,580 crore. The average income tax paid worked out to around Rs 7.04 lakh. While at an average level this was substantially higher than the income tax paid by those paying tax of up to Rs 1.5 lakh, on the whole it was lower.

What does this mean? This essentially means that when it comes to income tax there is a fortune waiting for the government at the bottom of the pyramid. The term “fortune at the bottom of the pyramid” was coined by management guru CK Prahalad in a book of the same name.

In this book, Prahalad looked at the distribution of wealth and the capacity to generate incomes in the form of an economic pyramid. As he wrote: “At the top of the pyramid are the wealthy, with numerous opportunities for generating high levels of income. More than 4 billion people live at the bottom of the pyramid on less than $2 per day.”

Prahalad’s book was about these people and he felt that the “dominant assumption is that the poor have no purchasing power and, therefore, do not represent a viable market.” This he believed was incorrect and went on to show through various examples that even those earning less than $2 per day and can add up to substantial market size.

Along similar lines, those paying an income tax of less than Rs 1.5 lakh can also end up paying a substantial amount of income tax in total, though individually the income tax that they pay is low.

Hence, there is a lot of money that the government can collect at the lower end as income tax. This is a point that was made even in the most recent Economic Survey, released in February earlier this year. Take a look at the following chart.

05132016-Vivek-DRChart

What does this tell us? It shows very clearly that the basic tax exemption limit, only above which an income tax has to be paid, has risen at a much faster rate than the per capita income in India. As the Survey points out: “We can calculate in some sense the “missing taxpayers” in India—not those who are evading taxes altogether or under-reporting taxes but those who have legitimately gone under the tax radar due to “generous” government policy.”

What does this calculation tell us? Or to put it simply who are these missing taxpayers? These are those taxpayers who got left out because the basic exemption limit beyond which an income tax has to be paid has been raised from the level of Rs 1.5 lakh in 2008-2009. It currently stands at Rs 2.5 lakh.

If this threshold had not been raised as rapidly as it was, the government’s income tax collections would have gone up tremendously.

As the Economic Survey points out: “We ask how many taxpayers there would have been in 2012-13 if the threshold had been maintained at Rs. 1,50,000 (the threshold limit in 2008-09). We find that there would have been an additional 1.65 crore units incorporated within the taxation system (an addition of about 39.5 percent) and tax revenues would have been about R31,500 crores greater. India’s tax-GDP would have increased by 0.32 per cent just by not having raised the threshold so generously.”

In fact, the Survey also points out that there is a lot that India can learn from China on this front. As it points out: “[The] Chinese success in bringing more citizens into the individual income tax net owes to setting a reasonable threshold for paying taxes and not changing it unduly. In contrast, in India, exemption thresholds for income taxes have been consistently raised. In fact, as Figure 7 [the chart shared above] shows, thresholds have been raised much more rapidly than underlying income growth so that today, the wedge between average income and the threshold has widened.”

The finance ministers who increased the tax exemption limit knew what they were doing. They were basically playing to the gallery. But the loss of taxes on this front was more than made up for through first through a higher service tax rate and now through various cesses like Swacch Bharat Cess and Krishi Kalyan Cess.

Of course, indirect taxes are in the end paid by everybody, even those who are not a part of the formal sector. In that sense, it was only fair on those paying income tax.

It is worth remembering that in economics there are no free lunches. If the government gives from one hand it takes away from another.

Disclosure: The basic idea for this column came after reading R Jagannathan’s column Why Nicking The Non-Poor May Yield More Tax Than Just Mugging The Rich on SwarajyaMag.com

The column originally appeared on the Vivek Kaul Diary on May 13, 2016

Piketty’s Tax Plan to Lower Inequality in India is Slightly Rickety

thomas piketty
This is something I wanted to write last week but could not given that Satyajit Das’s three part interview took up all the space.

The French economist Thomas Piketty was in Delhi recently to launch the Hindi edition of his book Capital in the Twenty First Century, among other things. During the course of an interview to The Hindu, Piketty said: “I hope the Indian elite will behave much more responsibly [in paying more taxes] than the western elite did in the 20th century.”

Piketty wants India’s elite to pay more tax to ensure that the income inequality in India comes down. In another interview to the Mint newspaper Piketty said: “India is a relatively high inequality country with a very strong legacy of extreme inequality for centuries between groups.”

Piketty feels that India’s income inequality is close to that of Brazil and South Africa with the top 10% making 50-60% of the total income. Piketty also feels that the income inequality in India may have gone up in the recent past. As he told The Times of India in an interview in November 2015: “The share of India’s national income going to top percentiles declined in the decades following independence, but has been rising since the 1980s-1990s, and is now back to pre-Independence levels, or maybe has surpassed them. The problem is that we do not really know, because it has become impossible to access income tax statistics.”

This income inequality can be addressed by taxing the rich more, feels Piketty.

[In fact, everyone does not agree with Piketty’s view of income inequality in India. Here is another view.

As Tim Harford writes in The Undercover Economist Strikes Back: “There simply isn’t enough money in India yet for it to be unequal.”

Harford explained what he meant by this in an interview to me where he said: “The World Bank economist Branko Milanovic has this idea of the “inequality possibility frontier”. Imagine an extremely poor subsistence society. Then imagine some class of plutocrats, who somehow confiscate wealth and spend it themselves. How much can they take? The answer is: not much if the society is to survive, because the poor cannot dip below the average income because the average income is barely enough to keep you alive. Now imagine a much richer society. This, in principle, could be far more unequal because the poor could still survive on a tiny fraction of the average income. Milanovic and co-authors were interested not only in how unequal a society is, but how unequal it is relative to how unequal it could possibly be. My point was that despite important gains over the past twenty years, India is still a very poor society. There’s a limit to how unequal it can get until it gets richer – which should make us worry about the inequality we do see.”]

Let’s get back to Piketty. Taxing the rich more was one of the main points that Piketty made in his book Capital in the Twenty First Century. As he writes: “The historical evidence suggests that with only 10-15 percent of national income in tax receipts, it is impossible or a state to fulfil much more than its traditional regalian responsibilities: after paying for a proper police force and judicial system, there is not much left to pay for education and health. Another possible choice is to pay everyone—police, judges, teachers, and nurses—poorly, in which case it is unlikely that any of these public services will work well.”

How do things look in India’s case? If we look at the annual budget of the government of India for 2015-2016, it’s tax revenue amounts to around 6.5% of the nominal gross domestic product (or national income). This is well below the limit that Piketty talks about.

It is very clear that the central government needs to collect more taxes than it currently is. There is no denying that. Piketty feels that it is time that India’s rich pay more taxes. He also suggests that India’s rich should be taxed more. It is important to realise here that the rich are not going to pay higher taxes on their own and hence, they need to be taxed more.

As Piketty told The Hindu: “India has zero wealth tax,” with the underlying message being that India needs to tax those who have wealth.

There are two issues here essentially: taxes and inequality. Let’s talk about inequality first. As Satyajit Das, an economic commentator and the author of The Age of Stagnation put it to me: “There are several sides to inequality. There is a moral and ethical dimension. There are arguments of fairness. There are arguments of proper incentives for achievement and skill. Each person will have a different view on that.”

But the economic argument is simpler. And what is that? As Das puts it: “First, empirical research suggests that an increase in income inequality by 1 Gini point decreases the annual growth in GDP per capita by around 0.2 percent.” Gini coefficient is a measurement of inequality where a gini coefficient of zero expresses perfect equality whereas a gini coefficient of one expresses maximal inequality.

To put it in simple English greater inequality of income leads to slower economic growth. And why is that? Das has an answer: “Higher income households have a lower marginal propensity to consume, spending a lower portion of each incremental dollar of income than those with lower incomes. US households earning US$35,000 have a marginal propensity to consume an amount from each additional dollar of income which is around three times that of a household with an income of US$200,000.”

Inequality comes with a huge social cost as well. As Das puts it: “Widening disparities in income level also impose direct costs such as life expectancy, crime levels, literacy and health. Rising inequality is associated with higher crime rates, particularly violent and property offences, poorer health, as well as family breakdowns and drug use. Unequal societies are affected by diseases of poverty, such as TB, malaria and gastrointestinal illnesses arising from poor nutrition and hygiene, inadequate housing, and a lack of
sanitation and access to timely health services
.”

What all this clearly tells us is that income inequality is a problem. Is taxing the rich more really a solution to this?

It is worth asking here in the Indian context who are the rich when it comes to paying taxes? It is worth remembering here that in his February 2013 budget speech, the then finance minister P Chidambaram had estimated that India had only 42,800 people with a taxable income of Rs 1 crore or more.

As Piketty said in one of his interviews it is next to impossible to get hold of income statistics in India. Nevertheless, some progress has been made in the recent past. Akhilesh Tilotia of Kotak Institutional Equities, who is also the author of The Making of India, has done some excellent analysis on this front.

As Tilotia writes in a research note titled How Many Crorepatis in India released in early December 2015: “As e-filing of income taxes becomes the norm and the government gives out glimpses of data, it is now possible to estimate the number of entities in various slabs of incomes. Data suggests that over the four-year period of FY2011-14, the number of non-corporate entities reporting incomes > Rs10 million [or Rs 1 crore] has gone up 3 times to 63,589.” A non-corporate assesse includes “individuals, Hindu undivided families, partnerships, association of persons, etc.” This is around 0.5% of India’s population writes Tilotia.

What does this tell us? This tells us very clearly that very few of India’s rich actually pay taxes. So increasing the tax rates, as Piketty suggest, is really not a solution because the government will end up taxing the same set of people who are already paying a major part of India’s taxes.

Take the case of wealth tax. The finance minister Arun Jaitley abolished the wealth tax in the budget speech he made in February 2015. As Jaitley said during the course of his speech: “The total wealth tax collection in the country was Rs 1,008 crore in 2013-14.”

This basically means two things: a) Very few people in India bothered paying wealth tax. b) The income tax department was not in a position to get more people to pay wealth tax.

Also, it is worth remembering here that many Congress finance ministers since independence drove a substantial part of the Indian economy underground by having very high rates of income tax. The marginal rate of income tax even reached 97% at a certain point of time.

So a higher income tax rate is clearly not a solution to reduce income inequality in India. The solution is to bring more and more Indians who should be paying income tax, but do not, under the tax bracket. This means simplifying the income tax system. It also means making the income tax department more efficient through the use of information technology. And finally, it means reducing corruption in the department.

That is the solution to reducing income inequality in India. Higher tax rates are clearly not the way to go about it.

This column originally appeared in the Vivek Kaul’s Diary on February 1, 2016.