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Need for progressive property tax and strong tax administration

In the second lecture in the series, ‘Inequality Conversations’, hosted by the Centre for Public Policy at IIM Bangalore, former deputy governor of RBI NS Vishwanthan says taxation policies can alter income and wealth distribution to the benefit of those in the lower economic strata

7 FEBRUARY 2022: In his lecture this evening, on ‘Review of Taxation Policy’, delivered as part of the Centre for Public Policy’s ‘Inequality Conversations’, Prof. NS Vishwanathan, former deputy governor of RBI and Senior Fellow at IIM Bangalore, emphasized that it is important to understand the different dimensions of inequality in order to appreciate the efficaciousness of taxation policies followed in different parts of the world.

He explained that among the measures used to assess inequality are the ratio of the share of income of top 10% of population to that of the bottom 50% of population as well as the ratio of share of wealth held by top 10% of population as compared to that held by the bottom 50% of population. Analysis of how these measures pan out globally, between different regions of the world and different nations shows that while globally, inequality is undoubtedly very large, it varies from country to country and region to region with several countries and regions displaying steeper inequalities than the global average. It should also be understood, Prof. Vishwanathan explained, that where the inequalities are severe in the poorer countries, it translates into sub-subsistence level living for a large section of the population.

He pointed out that taxation policies can alter income and wealth distribution to the benefit of those in the lower economic strata. “Data shows that in many countries, the income disparity measured by the ratio of income of the top 10% population to that of the bottom 50% population comes down post taxation and transfers. However, to reduce inequalities, there is a need to tax wealth on a progressive basis as opposed to a flat rate now applied in many jurisdictions. Similarly, one needs to look at corporate taxation as opposed to just taxing wealthy individuals,” he said. 

Globally, however, corporate income tax rates are moving southwards. The lower rate of corporate income tax as opposed to personal income tax results in individuals corporatizing their activity to benefit from it. Also, the current global competitive corporate taxation enables large corporates to shift profits to low taxation jurisdictions. “There is therefore a move towards global minimum tax implying that the home country of a multinational can tax profits from another jurisdiction to the extent of the difference between the corporate tax applied by the host jurisdiction and the minimum tax rate agreed upon. The efficacy of such an arrangement is, to an extent, the function of the minimum global tax that is agreed upon,” he explained, adding that, for example, at a minimum tax rate of 15%, India could get an additional tax revenue of euro 0.5 billion and this would go up to euro 1.4 billion if the minimum tax rate is 25%.

“There is also the question of nations taking unilateral decisions like FATCA by USA as opposed to a coordinated information sharing arrangement,” he observed, adding that FATCA works because there is a punitive element for non-compliance. “But one needs global economic clout for this.”

Moving to the Budget summary of 2022, Prof. Vishwanathan said one needs to work on increasing the tax to GDP ratio and raise the share of direct taxes. The regressive impact of higher share of indirect taxes is addressed by directing public spending towards activities which result in greater socio-economic welfare of those in the lower economic strata.

Among long term policy actions, he suggested 

  • Convergence on a global minimum corporate tax to prevent race to the bottom

  • Progressive property taxes 

  • Targeting a specified change in post-tax income distribution through fiscal policy

  • Strong tax administration.

In his introduction to the lecture, Professor M S Sriram, Chairperson, Centre for Public Policy at IIM Bangalore, set the context for the series in the backdrop of the World Inequality Report 2022. “The Centre for Public Policy has lined up several more conversations in this series where we will address different kinds of inequality. So stay tuned,” he added.

Watch here: https://youtu.be/tGd6NnVxjms