Make the poor richer without making the rich poorer
A pragmatic approach to reducing the rich-poor gap is by maximising economic growth, minimising unemployment, lowering the tax burden and providing a safety net for the poor
Since the Congress party released its election manifesto on April 5, the word ‘redistribution’ has dominated the election discourse. Prime Minister Narendra Modi alleges that the Congress’ manifesto promises to ‘redistribute’ wealth by taking away people’s gold, mangalsutras, imposing new taxes and giving it to poor minorities. Except, there is no mention of ‘redistribution’, ‘mangalsutras’ or, ‘wealth tax’ in the 48 pages of the manifesto. The election in the world’s largest democracy is now a contest over missing words.
Nevertheless, this has triggered a furious public debate over
India’s inequality and the idea of redistribution to bridge the gap between the haves and the have-nots. It is simply incontestable that the economic disparity between the rich and the poor has widened alarmingly over the last two decades, not just in India but across the world. It is puerile to politicise this serious issue by quibbling over which political party’s tenure has exacerbated economic inequality. The fact is that the world is becoming more and more unequal and it is not in the larger interest of any society to let this fester. The real argument is over how one should bridge this gap and aspire for a more equal and just society.
The gap between the rich and the poor can be bridged by either making the rich poorer or the poor richer or both. Does one believe that the size of the overall economic pie is either xed or will not grow fast enough for the rich to keep their share and the poor to get a greater share? If the answer is yes, then the thinking to achieve a more equal society is shaped by what sociologists call a ‘Pareto Optimum’, under which it is impossible to make one person better o without making another worse o. Developed nations, that can only grow slowly, are forced to adopt a ‘Pareto’ path to reducing inequality. But developing nations that can grow much faster need not. This is the fundamental philosophical dierence across the ideological spectrum to solving inequality.
‘Fix the system’
The idea of a wealth tax to extract from the super rich and give to the poor stems from a ‘zero sum’ thought to reduce economic disparity. It is entirely legitimate to question if the rich acquired their wealth through fair means and perhaps most don’t in countries like India. But taxing their wealth because it is ill-gotten conates the process with the outcome. If the system is corrupt to let a few acquire wealth illegitimately, then x the system, not tax it in the garb of bridging inequality.
An inheritance tax may sound even more morally correct in that it is unfair that a child born into a rich family can be wealthy on day one, while another born into a poor family starts with a huge disadvantage. But the ultimate goal is to bridge economic inequality, not resolve an ethical quandary. Such vindictive ‘tax the rich’ measures neither provide enough resources to make a signicant impact nor foster a healthy climate to reduce the rich-poor disparity.
In the current stage of India’s development cycle, economic growth is necessary for increasing the size of the overall economic pie. Economic growth needs investment. A confrontational ‘make the rich poorer’ policy attitude can hinder investments and trigger ight of capital.
India’s inequality is a result of lopsided economic growth and taxation. It is well established that India is experiencing jobless growth where headline GDP growth does not translate into jobs, incomes and prosperity for a large majority.
As I showed in my July 2022 article ‘Whose GDP is it anyway’ in The Hindu, every percentage of GDP growth today generates less than one-fourth the number of formal jobs than it did in the
1980s. This is mainly due to contemporary economic development models that prize capital over labour for eciency. So, the key to reducing economic disparity is to rebalance the capital-labour skew through labour market focused policy incentives. This is the rationale behind some of the Congress manifesto promises such as the right to apprenticeship for youth, employment linked incentive schemes for corporates and promote unskilled labour intensive economic activities.
The other driver of India’s inequality is the imbalance in taxation where the common person pays more than the corporates in the share of taxes. Out of every 100 rupees that India collects in taxes, 64 rupees come from the poor and middle class through indirect (GST) and income taxes, while only 36 rupees come from rich corporates. Essentially, the poor and common person suers a double whammy where they are not only excluded from the gains of economic growth but are also taxed more vis-à-vis corporates. This is why the manifesto promises an overhaul of India’s taxation structure through a simpler, lower GST indirect tax rate and a new direct tax code.
It is important to ensure a social security net through welfare programs for the poor until they can reap gains of economic growth. Such programs can be funded through a combination of faster growth, higher tax buoyancy and ecient welfare delivery without having to resort to penalising the rich.
A pragmatic approach to reducing the rich-poor gap is by maximising economic growth, minimising unemployment, lowering the tax burden for the common person and providing a safety net for the poor. This involves a delicate balancing act of labour market incentives, welfare safety nets and attracting investments. But punitive and spiteful taxation of the rich to pay the poor is not workable, wise or welcome. India can reduce inequality by making the poor richer without having to make the rich poorer.