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Additional tax burden on super-rich is flawed; goes against Narendra's Modi's claim of kamdars over naamdars

Madhavan Narayanan

If taxing the rich to help the poor is socialism, you could say Prime Minister Narendra Modi has taken a leaf out of late PM Indira Gandhi's Nehru-era playbook. That is understandable in a nation of 1.3 billion people in which 20 percent of the people still do not get their basic needs. But, the additional tax burden on the "super-rich" that Finance Minister Nirmala Sitharaman proposed in the Budget for 2019-20 has a flawed design that flies in the face of Modi's own famous claim that he puts kaamdars (those who do) like himself over naamdars (those who use their names for dynastic gains). Such a principle should logically apply not just to politics but also to economics.

From all indications, the effective tax rate of up to 42.75 percent on those earning above Rs 2 crore per annum hurts not those who may inherit wealth but those who use their hard work and skills to be high-value earners. Think of a software expert in Bangalore who is good enough to generate patents for a multinational's research and development unit, but may not have inherited a penny. Or a partner in a consulting firm or a vice-president in a big company. Possibly, this list might include movie stars, artists and sportspeople, though there are some special provisions in tax administration to help people who have shorter careers. Such people are kaamdars€"not 'naamdars".

Though there has been a clamour to tax India's increasingly multiplying super-rich, there is a parallel narrative on since economic reforms started under former Prime Minister Narasimha Rao in 1991 that wealth creation should not be taxed as investments help growth, that in turn boosts jobs and incomes. That was the rationale behind the abolition of the now-reintroduced tax on long-term capital gains.

Now, consider wealth tax and/or inheritance tax. Wealth tax was in vogue until 2015 when it was abolished because its costs outweighed its gains, while estate duty (an inheritance tax) was discontinued in 1985, ostensibly on the ground that stamp duty payments already exist for the transfer of property. Those who inherit because their parents or ancestors earned fortunes are less in line with an egalitarian constitution that promises justice for all. This egalitarianism was the logic behind the abolition of the privy purse for erstwhile princely rulers in 1971 under Indira Gandhi's rule.

An inheritance tax€"if it is a prudently used one€"is a soft way of putting a premium on the earning of wealth by work or enterprise over one in which it is acquired by family connections. True, a smart chartered accountant can disguise wealth as income by some clever book-keeping, but there is no running away from the fact that income is income and inheritance is an unearned privilege in a social context. Family ties may have their own kind of labour invisible to social yardsticks but that is ordinarily not part of the egalitarian social discourse.

Sitharaman's Budget can potentially disincentivise those who invest in high-value skills such as a surgeon, an architect or a corporate leader€"the kind that earns annual incomes now covered by the super-rich tax net. Now, contrast them with the high-school-educated ward of a wholesale trader with considerable wealth whose main claim to fame is his father's immense affection for him. We are looking at a scenario where the naamdar gets away, while the kaamdar pays.

Does an inheritance tax discourage savings? Perhaps not when it is done prudently at a reasonable rate. Consider the fact that consumption also drives demand and growth in a market economy.

Any argument has two sides, but pragmatism alone cannot be a guide for taxation. Some things should reflect a social consensus, and there is reasonable ground to believe that the broad consensus in India is towards a culture of equality of citizens in which education, social conscience, and hard work are a positive value. There is no need for guilt in earning or spending if it is in line with this value system. From that point of view, the Budget raises more questions than answers. Perhaps it is time to introspect more on how a tax regime should abolish latter-day privy purses.

It is good to see a Budget that allows the sale of a house to invest in a startup without tax burdens, but we have to just hope that these do not result in shell companies being disguised as startups. A rule of the thumb should be that any income in which a shrewd lawyer or accountant can aid tax evasion while a sincere day worker gets unfairly taxed in a regime beyond her control is not a desirable one.

Productive economics requires not just a fair tax regime but also a smart one. (The writer is a senior journalist and commentator. He tweets as @madversity)

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