If India gave minimum support incomes to the rich before, it can do the same for the poor. Rahul Gandhi can do it.

rahulghandi.jpgIndia’s opposition leader has recently floated minimum income support. The 1.5% GDP equivalent it requires can be financed through a 3% tax on the richest 3000. It is not just an idealized safety net for the poor – it has been done before, for the super elites. If it works, it can be a model for adoption in other emerging democracies.

The largest democratic process in human history is a few months away. India’s political parties are scurrying to offer appealing policies to the masses in a bid to unseat the ruling right wing (BJP) party. A recent scheme has especially caught attention. The opposition leader (Rahul Gandhi) has proposed a minimum income guarantee for India’s poor. Statistically, the policy benefits a large enough mass of voters so that the similar proposals will eventually be offered by nearly all competing parties. India is a country with substantial poverty and few (if any) would disagree that social welfare nets are needed to emancipate those left behind by 7-8% national income growth. Experts have raised doubts, but only about how support is feasible and where to find the cash to implement such a scheme.

The LSE based economist Maitreesh Ghatak computes (using poverty lines) that a realistic scheme is indeed possible, and it needs financing worth 1.5% of India’s GDP. This money would bridge the gap between subsistence income and actual incomes of the poor. The caveat? There is an incentivization problem because the size of the income transfer depends on this gap. Those households that are close to (or above) subsistence will have incentive to under-report to derive larger transfer and ultimately waste precious fiscal capacity. The policy could backfire if it eats into government funds currently being used for subsidies and in-kind transfers.

But there is an alternative. It is equally realistic and only requires follow through from enthusiastic politicians. If India’s richest are wealthy enough to be globally ranked, then they surely have the capacity to generate the kind of revenues being imagined from redistributive taxation elsewhere. Taxes for transfers should look to the wealth holdings of the tiniest top fraction. As a simple back-of-the-envelope exercise, I was able to derive the tax rate and eligible population whose wealth could finance 1.5% of GDP. Using named rich lists, I found that a 3% tax on the net worth of India’s richest 3000 individuals (Rs 93 trillion or almost $1.5 trillion) just exceeds the targeted funds. The wealth of the Top 10 Indians alone is worth over 5% of GDP and the Top 100 taxed at 3% alone would generate revenue equal to 0.5% GDP. There is extreme inequality at the top, but that means drawing on such wealth is not impractical. A tax (or surcharge) would not inconvenience over 99.99% of India’s voters and so has political advantages. Will it increase the burden on fiscal balances? If we consider that the wealthy predominantly get rich via (realized or unrealized) capital gains, then by definition they accumulate wealth outside the domain of GDP itself; GDP is an accounting concept and only counts income from new production, not from revaluation of existing assets. Ultimately the target is a monetary amount measured relative to GDP. The money itself does not come from within GDP.

Computations using 2017 data

 

Total Wealth

Total Wealth

Returns to wealth at 10%

Revenue from 1% tax on wealth

Revenue from 2% tax on wealth

Revenue from 3% tax on wealth

Rs billions

% of GDP

% of GDP

% of GDP

% of GDP

% of GDP

Top 10

9,448

5.58%

0.56%

0.06%

0.11%

0.17%

Top 100

27,928

16.51%

1.65%

0.17%

0.33%

0.50%

Top 500

40,380

23.87%

2.39%

0.24%

0.48%

0.72%

Top 3000 

93,739

55.41%

5.54%

0.55%

1.11%

1.66%

All computations are based on 2017 data. Wealth taken from named rich lists for Top 500 (up to Top 617). Top 3000 computed using log-log relationship between Rank and Wealth (R.Sq = 98%). GDP and Exchange Rate from World Bank and Federal Reserve of St Louis respectively. Replications steps available here

The net benefits are numerous but will become even clearer with transparent public debate. Aggregate demand will go up in poorer regions via the consumption of the poor. The taxable base will be limited in size (between 3000-5000 individuals) and the staff needed to make the necessary audits kept to a minimum (roughly 30 officers looking into 100 accounts annually). Will the rich be expropriated? Consider this following: if a billionaire derives a respectable 10% return to their equities on average then a 3% tax still leaves them with 7% returns on their wealth. To draw down their wealth, the richest 3000 Indians would for example need to spend over Rs 8.5 million daily! Ironically, in much tighter fiscal times, India has actually run redistributive support incomes the other way, because the political class accepted that the costs were worth it. In its early independent decades, the government transferred a stipend to (the richest 500 or so) former aristocrats as compensation for their bloodless accession to the Indian Union. These sums were minimum income support for hereditary rulers to retain their lifestyles. Clearly, if the costs are justified for democracy over revolution and conflict, then the appetite to offer income support already exists.

The numbers are certainly there to engage discussion over this proposal today because India’s wealthy have now re-entered their positions amongst the global elite. They are able to acquire international companies, purchase foreign citizenships and spend astronomical sums on weddings. At the same time, India is home to the highest number of persons living in poverty. The core issue is deeper. In the interest of circumscribing class conflict, it is difficult to justify the existence of the world’s richest and poorest under the same national boundaries. Extreme inequities have been brought to light in the run-up to the farcical World Economic Forum. Populist movements are consuming social democracy. Surely, once again, the costs of redistribution are worth it.

Rishabh Kumar is Assistant Professor of Economics at California State University. @Kumar_EconIneq.  

Calculations are available as excel files on the author’s webpage.

Photo of Rahul Gandhi speaking at The Doon School Model United Nations’ (DSMUN) conference in August 2017, by BlakeShramster.

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