Wednesday, January 23

Taxing the super rich - the great debate

Given the financial crunch that most governments are going through, there is one thing that seems to be an easy route - imposing higher taxes on the richer people. Earn more pay more taxes. This has been hotly debated across the world and India is no exception.

From the times of Robin Hood, squeezing the rich and passing on the benefits to the poor has had an emotional appeal - partly because they have it and so they can pay and partly because they are always a minority, so politicians can save their back by not adversely affecting the poor, usually their vote banks.

However, there have been numerous studies that has shown that there are better alternatives than taxing the rich. Higher taxes for the richer is usually counter productive in the long run as it encourages tax evasion and is a disincentive to work. Also, usually it is ineffective since the rich can plan their taxes effectively and can often save taxes.

As of 31s March 2011, the number of effective tax payers in India was only 33.57 million of the 1.2 billion that we have. Let me re-phrase this. 2.77% of the people in India fund for the rest of the country. That's shocking! The country needs to expand its tax base and tax more people.

Agriculture has been out of tax bracket for ages. The system was introduced as India was a agriculture based country, probably it still is. But extremely affluent people in agriculture sector do not pay tax and roam around in the most expensive cars and live in high rises. Bringing such people in tax net would be a more welcome step.

Noted American economist Arthur Laffer demonstrated in the famous Laffer Curve that low tax rates lead to higher tax adherence. The Government should endeavour to reduce tax rate and increase the tax net to cover more people paying taxes.

Sure India and the world needs money, but indeed, channelizing the energy to tax the heavy weights is a wrong direction governments are moving into.



  1. If you are planning to start a business? Read it!