BUDGET 2025 is round the corner. As in recent years, newspapers are full of alarming articles, all predicting disastrous consequences for the economy if a much-dreaded wealth tax or an inheritance tax is reintroduced in India. The discussion relating to a wealth tax or an inheritance tax has gained salience in recent years ever since the pioneering work of Thomas Piketty and his colleagues has put the issue of income and wealth inequality in the public domain. Piketty's ideas based on an examination of tax records in select countries show increasing inequality the world over between the top 1% and the bottom 50% of the population.

Apart from questioning the methodology adopted by Piketty in his work, most of the articles/ editorials/ opinion pieces point out that a wealth taxes although once prevalent in many western jurisdictions have been gradually phased out and there are very few jurisdictions that levy such a tax. Joining the debate, even Raghuram Rajan has asked the rationale of a wealth tax asking people to point out even one jurisdiction that has collected substantial revenue from a wealth tax.

In India, most of the critics of wealth tax refer to the history of the tax in India and to the fact that very little revenue was generated from the wealth tax that was in force in India between 1957 and 2015 when it was abolished on the ostensible ground that it collected very little (roughly INR 1000 crores in 2013) and that the cost of collection of such a tax was disproportionate to the efforts in collecting such a paltry tax. The same arguments are also repeated while criticising any move for re-introduction of an estate duty, again pointing out that the ED collected a paltry 20 crores in 1985 when it was abolished.

Such criticisms ignore the fact that in India neither the wealth tax nor the estate duty was properly administered and that the laws were riddled with various exceptions. In the case of wealth tax, it was further emaciated by the distinction introduced between productive and non-productive assets and eliminated all financial assets from its ambit. Therefore, to expect any substantial revenue from such a wealth tax was irrational.

In recent debates, reference is also made to the mobility of capital and it is argued that such a tax would only encourages capital flight from India. Reference is also made to reports particularly the ones put out by Henley and Partners mentioning the number of rich people from different jurisdictions (more particularly from China, Russia, and India) that gave up citizenship to locate abroad. Henley specializes in promoting jurisdictions that encourage or grant citizenship by investment, a programme that is under attack in many European jurisdictions. Besides, as is pointed out by the Tax Justice Network, the number of taxpayers that actually move to other jurisdictions purely for tax purposes seem to be exaggerated.

The idea of a progressive wealth tax nevertheless has gained traction in the past decade due to the persistent work by academics -Thomas Piketty, Emmanuel Saez, Gabriel Zucman amongst others besides the work of the advocacy group- Tax Justice Network in bringing out in sharp relief the massive growth in income and wealth inequality amongst the very high net-worth individuals and those at the bottom of the pyramid. Thomas Piketty in particular corelates this growth in inequality to the reduction in the personal tax rate, the reduction on corporate tax rate and the abolition of wealth tax in most of the countries.

Thanks to the work of Piketty and others, it is now well accepted that despite absolute poverty amongst the population having come down almost everywhere, inequality of income and wealth between the top 1-10% of the population and the bottom 10-50% of the population has skyrocketed over the years. The question therefore is whether policymakers should be bothered with the issue of inequality. It is here that there is a divergence of opinion with the disciples of Milton Friedman who considered inequality as inevitable and, in effect, a driver for growth and capital formation arguing that social levelling would remove the incentive for hard work.

According to an IMF paper though while some inequality is inevitable in a market-based economic system as a result of differences in talent, effort, and luck, excessive inequality could erode social cohesion, lead to political polarization, and ultimately lower economic growth. Effective social spending and taxation policies are therefore essential elements for dealing with income inequality. "A fair and equitable distribution of income is a fundamental element of the social contract. Macroeconomic policies (including government tax and spending policies) have significant effects on income distribution and that inequality can have adverse political and social consequences, with the potential to undermine macroeconomic stability and sustainable growth."
(https://www.imf.org/en/Topics/Inequality/introduction-to-inequality)

In a recent lecture at the world Knowledge Forum, on the topic of Future of Inequality, Abhijit Banerjee asserts that at least since 1900s we are now at the global heights of income inequality and that such inequality that was decreasing till 1980s started increasing with the advent of Ronal Reagan and Margaret Thatcher and with China becoming a market economy. In Reagan's time, marginal tax rate in the USA was brought down in one go from 70% to less than 40% with significant consequences. Inequality being legitimised in public policy, within firms also, the ratio of salaries of CEOs to lowest -paid workers started growing and now reaches stratospheric level. Mr Banerjee asserts that there is no correlation between changes in GDP growth and changes in inequality. He also mentions that even amongst the wealthy, there is a difference between the top 1% and the top. ooo1% whose income grew 3 times as much. According to him, too much concentration of wealth actually brings down competition and also investments. "If you are profitable, you invest but if you are profitable because of monopoly, you do not even invest", Mr Banerjee argues. He also mentions that currently, increasing share of income of the super-rich is coming from wealth and not from income. Besides, as people get richer, they cannot spend the money and they get even richer. Therefore, he asserts that there is a need to look at wealth taxes and a global agreement to ban tax havens.

The need for reduction of inequality got a boost with the rotating presidency of G-20 for 2024 having passed from India to Brazil. President Luiz Inácio Lula da Silva, popularly known as Lula, having come from an extremely poor background and being founder of the worker's party in Brazil, made reduction of inequality one of the central planks of Brazilian Presidency of the G-20 within the broader theme - Building a Just World and a Sustainable Planet. In the first meeting of the Finance Ministers and Central Bank Governors in February 2024 in Sao Paulo, he invited Economist Gabriel Zucman to make the case for a reform to safeguard tax progressivity. In his presentation, Professor Zucman advocated for a coordinated minimum tax on billionaires, a reform that would build on the previous steps of international cooperation in the sphere of corporate taxes to address the issue of low effective taxation of the super-rich.

The Ministerial declaration issued thereafter, inter-alia, mentioned as follows:

"We reiterate our commitment to promote strong, sustainable, balanced, and inclusive growth, and to accelerate progress toward achieving the Sustainable Development Goals (SDGs), in accordance with the ambitious mandate from the 2023 G20 New Delhi Leaders' Declaration. To that end, in 2024, we will focus on mainstreaming inequality as a key policy concern; enhancing the representation and voice of developing countries in decision-making in global economic and financial institutions in order to deliver more effective, credible, accountable and legitimate institutions (…)

Following the meeting, the Brazilian G20 Presidency commissioned a report to Mr. Zucman to highlight the details and feasibility of the proposal. This report, entitled "A blueprint for a coordinated minimum tax on ultra-high-net-worth individuals" was released at the end of June, 2024 in advance of the G20 Finance Minister Summit of July 2024.

In his report Zucman builds on the fact that progressive taxation is the key pillar of the modern tax system of democratic societies in that it strengthens social cohesion and trust in governments to work for the common good. It is to find public goods and services that are engines of economic growth.

Changes in the progressivity of taxation have always been a major driver of the evolution of income and wealth concentration. According to him, there is now clear evidence that the current tax systems instead of being progressive do not effectively tax the HNIs.

Working with the tax administrations of France, Italy, the Netherlands and the USA, researchers show that when all taxes paid by people at all levels of government (including VAT) are considered, the HNIs actually pay less taxes as a proportion of their income. In other words, the extant taxation system overall is actually regressive. This finding is interesting in as much as we often hear the lament that most of the taxes in India are paid by the top 5-6% of the population. Such complaints do not consider the indirect taxes paid by the general public. Zucman shows that even if one considers only income tax, as a percentage of income, for most of the income distribution, the tax is progressive but then at the very top, it becomes regressive and, in some cases, touches zero. (Netherlands).

Zucman attributes the regressivity of the current system to three factors- the failure of income tax which is the main instrument to ensure progressivity. This is achieved by avoiding dividend distribution and by avoiding realization of capital gains. Besides, HNIs can also avoid taxes through the medium of holding companies, trusts etc.

According to him, this failure, deprives governments of substantial amounts of tax revenue and contributes to concentrating the gains of globalisation into relatively few hands, thereby undermining the social sustainability of global economic integration. In his presentation, Zucman explains that the wealth of the top .0001 of the global billionaires as a percentage of total global wealth has increased from around 3% of the world GDP to around 14% of the world GDP.

Taking inspiration from the work of the G20 in the area of international tax and in particular, the global minimum tax of 15% for large multinational corporations coupled with the improvements in the area of international tax cooperation whereunder more than 100 countries have started exchanging bank details automatically under the common reporting standard, Zucman proposed the idea of taxation of ultra-high net worth individuals through effective international cooperation.

His proposal suggests a minimum tax on only dollar billionaires who according to the author number only 3000 all throughout the world. According to him if only 2% of their wealth is taxed as a minimum income tax, the regressivity of the tax system at the very top can be arrested and people with highest ability to pay taxes would not pay less taxes as a percentage of their income than other socio-economic groups. In this connection, one is reminded of the lament of Warren Buffet who famously said that he pays at a lower tax rate than his secretary.

The author posits that governments will be able to garner about $200- 250 billion annually in extra resources that can be utilised for various purposes, including for mitigating climate change. And, if the tax is extended to centi- millionaires, then that will also help to reduce the regressivity. The proposal according to Zucman is not for a levy of global wealth tax but a global minimum income tax expressed in terms of wealth and if a billionaire actually pays in a year 2% of the wealth as taxes, then no further tax will be payable for that year.

The rational of selecting the tax as a percentage of wealth is because of the fact that wealth is, generally speaking, more visible, than other indicators such as income. Moreover, at the very top, bulk of the wealth consists of shares in companies that are mostly publicly listed and therefore valuation issue is obviated. However, in order to be effective, the tax has to be internationally coordinated although countries can implement it through domestic legislation just as in the case of the global minimum tax that is being implemented by more than 100 countries.

The main challenge that he identifies for the proposed tax is the absence of information about the beneficial ownership of the assets. In this regard, he suggests the tweaking of the country-by-country report submitted by multinational companies and by creating a new form of information exchange on high-net-worth individuals. The other risk is the propensity of the individuals concerned to relocate to non-participating countries. This can be mitigated by having an exit tax and through the mechanism of the tax collector of last resort that has already been adopted In the context of global minimum corporate tax that allow participating countries to tax the multinationals of the non-participating countries and the same principle could be used to tax Ultra-High Net worth individuals.

According to the author, the key virtue of a minimum tax is that it addresses all forms of tax avoidance at once. The virtue of expressing the tax as a fraction of wealth is that wealth is harder to manipulate that then income and the virtue of an annual tax as opposed to a one-off tax at the time of death Is that it more effectively safeguards progressivity at the top of the wealth distribution because it ensures that individuals with the highest ability to pay taxes cannot postpone taxation for years or decades.

So, how was the reception of the report? If we turn to the July Declaration of the G-20 Finance Ministers- it mentions as follows-

"(..) Affirming our commitment to strengthening tax transparency and continuing to foster the global dialogue on fair and progressive taxation, while considering domestic circumstances, needs, and priorities, such as fair distribution of tax burden,

In the spirit of inclusive and effective international tax cooperation, building a just world, a sustainable planet, and a more stable and fairer global tax system,

We, the Finance Ministers of the G20, declare:

10. With full respect to tax sovereignty, we will seek to engage cooperatively to ensure that ultra-high-net-worth individuals are effectively taxed. Cooperation could involve exchanging best practices, encouraging debates around tax principles, and devising anti-avoidance mechanisms, including addressing potentially harmful tax practices. We look forward to continuing to discuss these issues in the G20 and other relevant forums, counting on the technical inputs of relevant international organizations, academia, and experts. We encourage the Inclusive Framework on BEPS to consider working on these issues in the context of effective progressive tax policies.

The same language is repeated in the final Leader's declaration released on the 18th of November, 2024. Thus, although there is commitment to adhering to progressive taxation and fair distribution of tax burden and effective taxation of HNIs, there is no commitment to adhere to the proposed solution, only commitment to continue further dialogue.

News reports indicate that there were differences and objections amongst nations relating to the proposed billionaire tax. Although France and Italy were reported to be backing the proposal, the USA represented by Janet Yellen was against the proposal. Media reports indicate that she told Wall Street Journal - Yellen told The Wall Street Journal that the United States is in favour of progressive taxation, under which the wealthy pay a larger share of their income than those of lesser means. However, she said, the "notion of some common global arrangement for taxing billionaires with proceeds redistributed in some way - we're not supportive of a process to try to achieve that. That's something we can't sign on to." (https://www.voanews.com/a/us-will-not-support-global-tax-on-billionaires/7620462.html)

So, what is the possibility of such a proposal or a modified version being adopted in the budget? In a recent event in Delhi organised by the Delhi School of Economics together with Research and Information Systems for Developing Countries, Thomas Piketty more or less expanded on the same theme and considering his research on India on income and wealth inequality, proposed a baseline, moderate and ambitious proposal for a wealth and inheritance tax in India that he said will address inequality in India. Drawing from European experience he asserted that countries in Europe have become more equal over the course of the 20th century and that this has made growth even faster.

Interestingly, the conference was also attended by V. Anantha Nageswaran, Chief Economic Advisor and Dr Shamika Ravi, member of the PM Economic Advisory Council. Dr Ravi disagreed with the basic premise that lower inequality is good for growth, saying that the causal link was unclear, and that her concern was the productivity of labour and that stagnant wages in many parts of the emerging markets were also a reflection of stagnant productivity of labour. On his part, Mr. Nageswaran highlighted the possibility of flight of capital as a result of the higher taxes on the rich. He emphasised that at its level of development, India's priority is poverty reduction and not reduction of inequality.