‘Do the communist revolution…’: Raghuram Rajan challenges Thomas Piketty’s wealth tax suggestion for India

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Former RBI governor Raghuram Rajan has challenged the effectiveness of traditional redistributive tax measures, such as wealth and inheritance taxes, arguing that they can be easily circumvented by the wealthy. 

Rajan’s take comes amid a new research paper authored by economist Thomas Piketty where he suggests the need to impose a 2 per cent tax on net wealth exceeding Rs 10 crore and a 33 per cent inheritance tax to deal with the problem of rising inequality in India, and create fiscal space for investments in the social sector. 

The paper titled ‘Proposals For a Wealth Tax Package to Tackle Extreme Inequalities in India’ proposes a comprehensive tax package on the ultrawealthy to tackle the massive concentration at the very top of the wealth distribution and create valuable fiscal space for crucial social sector investments. 

“Show me one country which has actually collected serious wealth taxes anywhere and I would challenge Piketty on that,” Rajan said in a podcast by India $ Global Left. “Take any meaningful wealth tax and show me one country that has collected more than a pittance on it.” 

Rajan pointed out that political will alone wasn’t enough to enforce these taxes effectively. He cites examples of countries such as the United States, where despite efforts to tax wealth, the actual collection remains minimal.

Instead of leveling down by attempting to tax the rich, Rajan advocates for “leveling up” by creating more opportunities for small and medium enterprises (SMEs).  Rajan advocates building a strong competition commission that ensures there is no concentration in any industry. “It is going to be far more effective in creating more opportunity for the small and medium sectors…a better financial system that lends to these sectors and not just to the big guys”. 

Rajan says leveling down typically is going to catch the upper middle class. “They are already paying high taxes because they’re salaried and they actually pay the taxes that their incomes generate. It not going to catch the very rich because they will find every which way of doing it and trust me if they can’t they will legislate a process which will do it”.

He provocatively suggests that the only sure way to achieve wealth equality through taxes would be something as extreme as a communist revolution, which he argues results in violence and poverty rather than a stable solution.

Rajan emphasizes the importance of fair tax practices and closing loopholes that allow income to be disguised as capital gains, which are taxed at lower rates. He calls for greater competition, improved access to finance for SMEs, and ensuring that everyone pays their fair share of taxes. By fostering a competitive environment and preventing tax avoidance, Rajan believes that income inequality can be addressed more effectively in India.

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