Why in News?
- The Global Tax Evasion Report 2024 - a report commissioned by Brazil’s G-20 presidency, was recently released.
- In this report, French economist Gabriel Zucman has recommended an annual 2% tax on individuals holding wealth exceeding $1 billion.
What’s in Today’s Article?
- What is a Wealth Tax?
- Analysing the Proposal to Tax Ultra High Net Worth Individuals
What is a Wealth Tax?
- Meaning: A wealth tax is a tax based on the market value of assets owned by a taxpayer.
- Wealth tax in India: It was governed by the Wealth Tax Act, 1957, however, it has been ruled out with effect from 1st April 2016.
- Pros and Cons of a Wealth tax
- Proponents:
- This type of tax is more equitable than an income tax alone, particularly in societies with significant wealth disparity.
- It promotes fairness and equality by taking into account taxpayers’ overall economic status, and their ability to pay tax.
- Critics:
- It discourages the accumulation of wealth, which drives economic growth.
- Administration and enforcement of a wealth tax present challenges, as determining the fair market value of assets leads to valuation disputes between taxpayers and tax authorities.
- Uncertainty about valuation also could tempt some wealthy individuals to try tax evasion.
Analysing the Proposal to Tax Ultra High Net Worth Individuals:
- Recommendation:
- Individuals possessing more than $1 billion in total wealth (assets, equity shares, etc) would be required to pay a minimum (2% of their wealth) amount of tax annually.
- This would be the basic requirement to safeguard global tax progressivity and could potentially raise $200-$250 billion a year globally from about 3,000 individuals.
- Rationale for such a tax:
- The wealth of the top 0.0001% households has surged more than fourfold since the mid-1980s.
- They owned 3% of world GDP in wealth, which rose to 13% in 2024.
- However, the contemporary tax systems worldwide are not effectively taxing the wealthiest individuals (effective tax rates are between 0% and 0.5% of their wealth).
- As a result, ultra-high-net-worth individuals tend to pay less in tax relative to their income.
- This in turn
- Deprives governments of substantial tax revenues,
- Contributes to concentrating the gains of globalisation into relatively few hands, and
- Undermines the social sustainability of economic globalisation.
- Significance of this proposal:
- Progressive taxation is a key pillar of democratic societies that helps strengthen social cohesion and trust in governments to work for the common good.
- Better tax revenues are also crucial to meet the investments required to address the climate crisis.
- Impact of this proposal:
- Finance Ministers of the G-20 group are set to meet in Rio de Janeiro.
- The proposal will serve as the starting point for a global discussion on ensuring under-taxed billionaires are made to contribute more to reduce inequality worldwide.
- Supporters and opposers of the proposal:
- Supporters: Brazil, France, Spain, Colombia, Belgium, the African Union and South Africa have backed the idea.
- Opposers: The U.S. Treasury Secretary Janet Yellen has opposed a global wealth levy.
- Relevance of the proposal for India:
- According to a study titled ‘Income and Wealth Inequality in India,’ India has seen a disproportionately sharper increase in wealth at the top of the pyramid between 2014-2023.
- Top 1% income and wealth shares (22.6% and 40.1%) are at their highest historical levels and India’s top 1% income share is among the very highest in the world.
- Therefore, a ‘super tax’ on the very wealthy might be a good idea for fighting the growing inequalities and providing additional fiscal space for the Indian government.
- A mere 2% tax on the total net worth of the 162 wealthiest Indian families will generate revenue equivalent to 0.5% of the country's GDP.