Speaking at an event hosted by Delhi based think tank Research and Information Systems for Developing Countries (RIS) on 15 December 2024, the French economist Thomas Picketty urged India to tax the super-rich to address inequality, advocating for measures, such as a 2% wealth tax and a 33% inheritance tax. If this sounds like a superficial solution for the problem and something taken out of the socialist playbook, it does because it is exactly that.
Macroeconomists generally tend to create theories, which are often logical, but have little to do with reality, while left-leaning macroeconomists with socialist and Marxist backgrounds tend to fabricate beautiful stories, which directly contradict reality and history. Yet, those opinions are aired with the same weight as those of the people who do actual work. In this case, he was contradicted by V. Anantha Nageswaran, the Chief economic adviser to the Indian government, who just pointed out the obvious – that such measures would result in capital flight out of India. As a result, the economy and the government budget will suffer. He was absolutely correct in his judgement and he knows that such measures can be harmful towards the Viksit Bharat 2047 vision.
The suggestions were an imposition of a 2% wealth tax on individuals’ assets above 10 crore rupees and a 33% inheritance tax for property above the same threshold. According to him, these steps could generate additional revenue equivalent to 2.73% of India’s annual GDP. To back the need for his statements, he quoted data from the World Inequality Lab report, which he co-authored, that the top 1% of India controls 22.6% of the national income and 40.1% of the country’s wealth, which are figures higher than those in the US or Brazil.
There are so many faulty statements within the above paragraph that it is hard to know where to start.
Firstly, it is not clear if the wealth tax would be levied on individuals, companies or both. Many countries’ legislation has various implications about taxation depending on ownership by a physical entity (a person) or a corporation of some sort and if it is a corporation, then various types of corporations could be taxed differently or not at all. An example is the UK, where properties owned by foreign companies can receive preferential treatment as they can be perceived as foreign investment. This is the reason why nearly all mid size and large properties, as well as office buildings and so on are owned by companies registered in other jurisdictions.
Secondly, it is unclear what is perceived as “assets”. Property taxes are mostly relevant for immovable assets. There are many types of assets and especially in the case of companies, those that are not real estate or cash can be both bigger chunk of the total ownership and harder to evaluate. Examples can be ownership of other companies or their debt or contracts giving rights for future purchases or sales of that or the agreements for exchange of cash flows with different parameters – essentially the whole derivatives universe. For non-economists, these are not negligible small part of assets – since these contracts can exist between any 2 parties and many are over the counter (OTC) products, they have multiplied extensively over the last 20 years and some analysts estimate that the total amount of derivatives in the world is 10 times that of the total world GDP.
Another example are the intangible assets, which are present in the balance sheet of nearly every company. Those include the trademarks, brand reputation, customer loyalty, market share of business and so on. For people outside of the financial sphere it sounds strange to tax something immaterial, but this is not a new practice in the world of business and it has been done for a very long time. As per Picketty’s comments, it is not clear whether this tax should be levied before or after the others. The tax system, through many of its provisions, is there to regulate certain economic behaviors and encourage others, so imposing this tax on top of the others would bring consequences, which would be hard to evaluate.
The other astonishingly bad idea is the inheritance tax of 33%. Currently India does not have inheritance tax. A look at the tax laws in Europe shows that many European jurisdictions have that as part as their legal framework, but the taxation is much lower and some do not even have it, such as Portugal. There are provisions for direct descendants for no tax in a few of the jurisdictions and those that tax do it at a much lower rate - Bulgaria starts at 0.4% for siblings and their children, while others start at much lower than the proposed – from a couple of percentage points to around 8%. Even for countries with high taxation, such as Germany, the 30%, which is still lower than what was proposed, is levied at assets exceeding 26 million euro, which is over 230 crore rupees.
To put it shortly- he was proposing harsher taxes at even lower tax brackets than the most taxed countries in Europe. Somehow, he also calculated that this would add 2.73% to India’s GDP. As I mentioned, it is nearly impossible to make a sound calculation for the expected state income. My guess is that he just took the value of the assets, levied the tax on them, applied inflation and distributed it across generations. Needless to say, this is beyond simplistic and are problems, which students are given in their introductory or intermediary macroeconomic courses at bachelor's level in universities. The reasons why they are given those problems are not to teach them how to calculate those values, but to expose the problems which they will encounter if they want to go that way.
![Thomas Piketty [OutlookBusiness] Thomas Piketty [OutlookBusiness]](https://www.thestrategicperspective.org/wp-content/uploads/2024/12/thomas-picketty-630x345.jpg)
A major flaw in the logic is not taking into account the change of the behavior of the population. In economics this is described as the price elasticity – the change in consumption or production per incremental change in the price. V. Anantha Nageswaran, the Chief economic adviser to the Indian government rightfully hinted at that saying that this would lead to outflows. As cost rise, more individuals and companies will choose to consume the good of living or doing business in India and go elsewhere. Has he calculated the loss of taxes because of decreased economic activity, less social security because of laid off personnel and such?
And what happens in the extreme case that a descendant of wealthy lineage is bequeathed a palace, which is turned into a hotel employing several hundred people, and is slapped with an inheritance tax of 33%. The business is closed, the employees are likely one per family, so just as many families will have to look elsewhere for income. If the tax is not paid then the government will have to take possession, but what will it do with it? History has proven countless times that government is not an efficient operator in most businesses. There are many reasons for that, but the most important one is that government employees, no matter how motivated they are, can never be more motivated than a person, whose fate (and family’s) depends on the opportunities that are created. The mindset of innovation, search for different venues and business lines and better efficiency is vastly different for a person with skin in the game. In the case of the government employee there will always be the salary at the end of the month and if it does not work out in that location, it could in another. A business owner does not have a safety net, so a solution must be found.
It is not surprising, however, that this logic came from a person of this background. A short look at his resume shows heavy influence and interests in the socialist agenda. Media skipped the fact that he was the author of the book “Time for Socialism” and was economic advisor to the presidential candidate in France from the socialist party Segolene Royal. Similarly, a few years later he supported the next socialist candidate Francois Hollande. After that came his appointment in the Economic Advisory Committee of the Labor Party in Great Britain.
What are the solutions? Taxing is inevitable so it would be rather naïve to consider its abolishment. The imposition of a flat tax at a lower level, however, can be very beneficial. Many argue that such tax favors the rich and lets the poorer parts of the society take the economic brunt of filling the state budget. Such tax, however, has much higher collection rate as individuals and businesses find it impractical to avoid it. Data from the European countries shows that countries, which imposed a 10% corporate tax managed to attract significantly higher foreign direct investments, which in turn helped create bustling and entrepreneurial economies. Tax avoidance and even money laundering often require costs exceeding 15% so the result in society is more tax collected in nominal value. In the end, this is all that matters. It is true that in this case the poor carry the society forward, but it is also true that in this scenario the poor start to get more opportunities to improve their conditions. States have greater budgets for social programs, such as healthcare, education, infrastructure and social benefits.
Socialist policies are generally short-term solutions to a long-term problems. As Margaret Thatcher put it- "The problem with socialism is that you eventually run out of other people's money.". India should not be playing with such policies and instead concentrate on developing the economy further. Taxes like that would be detrimental to growth and suffocating business creation. GDP of India grew at 7.6% in 2023, so the Indian government has found the way to reap benefits nearly 3 times more than what the proposed measures are. If they are implemented, the likelihood is that this growth will fall and the vision for Viksit Bharat 2047 will become a distant dream.
The author is an economist. The views expressed are personal.