Lately, the debate over wealth taxation has intensified, with proponents arguing for its role in addressing income inequality and funding social programmes. However, implementing a wealth tax is not without its challenges and drawbacks.

The “Proponents” and “Detractors” were sharply divided even when the debate of retention and abolition of Wealth Tax was at its peak till one fine day when the tax under reference was repealed, through Budget 2016- 17 to be precise. Dating back centuries, a tax on accumulated wealth has roots in ancient civilizations such as Mesopotamia, Egypt, Greece, and Rome which imposed taxes on property acquired and inherited. Rome used to levy the Patrimonium tax on the total wealth of its citizens. Feudal societies in medieval Europe relied on wealth taxes to fund wars and support monarchies.

Advertisement

France, as a European monarchy, collected ‘the taille,’ a direct tax on households based on the amount of land held. In the UK, estate duties were introduced to combat rising wealth inequality during the industrialization of the 18th and 19th centuries. However, it is in the aftermath of World Wars I and II that wealth tax grew to prominence with the introduction of federal estate and gift taxes by the United States in the early 20th century. With the advent of the 21st century, countries scaled back owing to the insignificant contribution to the overall tax revenues, administrative challenges and concerns about the economic impact.

King must collect tax like honeybee, enough to sustain but not too much to destroy, said Chanakya India introduced wealth tax in 1957. Over time, the tax base eroded, compliance became challenging, and inefficient collection led to the abolition of the wealth tax in 2015. The consequential loss to the exchequer was sought to be subrogated through levy of additional surcharge on the “super rich” under the existing tax regime. Taxing property unfairly penalizes only a select few.

This form of tax often leads to double taxation, first when the money is earned and second on the asset acquired with the tax suffered earning. The State should not dictate the virtuous usage of one’s own money. India aims to become a $5 trillion economy in the next three years with a vision to be an ‘economic powerhouse’ by 2047. The fact that this aspiration can never be translated to reality without the active suppor t of the so called ‘ultra-rich’ i.e., the businesspeople, industrialists and the like, can hardly be overstated.

High-networth individuals may alter their investment strategies, asset allocation, or even residency to avoid taxes and protect their assets. It could distort economic behavior by disincentivizing investment, entrepreneurship, and wealth accumulation. Such taxes could lead to reduced investment potential, further undermining economic competitiveness and distorting economic decision-making.

A policy flip-flop environment takes a toll on the trust and confidence with enduring economic development being the casualty. It discourages work, savings, capital formation, potentially hindering innovation and productivity. Advocates push forward the need to redistribute resources to reduce poverty and promote inclusive growth under the cover of the ability-to-pay principle but with alternative options available and working, taxing the wealthy may be counter intuitive. Normatively, the tax policies across jurisdictions are guided by Taxation Doctrines in relation to source, residency, holding, recipient etc. However the essential features peculiar to a State are influenced by the economic model of the day.

Tax as an instrument is used by the state depending on the chosen governance model, which brings the conversation of Capitalism v/s. Socialism to the fore. Capitalism emphasises on ‘Increased Production’ whereas Socialism focuses on ‘Fairer Distribution.’ It is a matter of fact that India embraced the socialist model for its economic governance till the beginning of the last decade of the 20th century when LPG reforms were rolled out and empirical evidence suggests that in the first four decades after independence more poverty was created than wealth.

The shift from the Socialist model to a near Capitalist model (Hybrid system) continues to exert its profound implications on almost all segments of the economy including taxation. When we adopted a new economic belief as a nation that rejects most of the old model’s principles and favors the opposite framework, it is fair and wise to create policies that align with the new programme. Specifically, under this renewed model, solely using tactics to discourage or single out the wealthy as a primary fiscal tool to pursue a socialist agenda could disrupt the current situation and also be subject to ethical and moral objections.

Any deviation even if an aberration would be a negation of the model-in-vogue. As a corollary, holding a few responsible for the inequalities that exist could legitimize Marxism’s assertion that Capitalism inherently breeds severe economic disparities, justifying the criminal actions of the disadvantaged as a response. Small wonder, such ideologies have failed to elicit acceptance even in jurisdictions where welfarism remains a formidable article of faith.

Besides these two universally acknowledged models, there exists a third model by the name of “Restrained Consumption” that was introduced by late Pt. Deendayal Upadhyaya as part of his seminal treatise titled “Integral Humanism”. The text opposes Unbridled Consumerism by drawing inspiration from Indian culture. In hindsight the concept resonates well with all the aspects that are actively debated under the overarching Climate/Environment Protection. While the goals of wealth taxation are laudable, its re-entry is likely to bring significant challenges and risks. It could undermine economic efficiency, exacerbate capital flight, and tax evasion. Policymakers must carefully weigh these considerations and explore alternative approaches to address income inequality and promote fiscal sustainability.

(The writers are practicing chartered accountants.)