Recently, the President of US, Joe Biden, laid out a framework for nearly US$1.75trn in social sector funding. The plan, inter alia, proposes a spending of $400 billion to help provide subsidized childcare for more than 6 million children and tuition-free preschool for 3- and 4-year-olds, along with $555 billion for clean energy initiatives, including $320 billion in tax credits, to help Americans pay for environment friendly home improvements and corporation’s transition to clean-energy manufacturing, over the next 10 years.
The President has proposed to fund this
spending through a 15% corporate minimum tax on large corporations, tax on
stock buybacks and a surcharge on the top 0.02% of high earners.
However, the proposal to tax the superrich (700
odd billionaires) on their unrealized gains on assets could not be pushed for
lack of necessary support. Nonetheless, the proposal has reignited an intense
debate, as the opinions are vertically divided on the legality and morality of
the proposal.
Those opposing it are arguing that taxing the
unrealized gains on stocks etc. would not stand the legal scrutiny as such
gains are mostly notional and do not meet the criteria of “taxable income”. Even
Democrats like Senator Joe Manchin opposed the proposal on the ground of
disparity. He reportedly said, “I don’t like it. I don’t like the connotation
that we’re targeting different people.”
Elon Musk, one of the Billionaires who would be
most affected by the proposed tax, argued that the proposal could open the door
to future tax hikes that would cover a wider range of middle-class Americans
with investments. “Exactly. Eventually, they run out of other people’s money
and then they come for you”, he reportedly commented on the proposal.
The supporters of the proposal however appear
convinced that it is morally and ethically appropriate, that the superrich pay
taxes on their entire income and not just the meagre salaries and dividend they
draw from their corporations.
Chuck Marr, Director of Federal Tax Policy at
the Center for Budget and Policy Priorities thinktank, cited the example of
Jeff Bezos, Founder of Amazon.com Inc. Jeff Bezos, reportedly draws a salary of
about $80,000 a year from his company, though his Amazon stock holdings
increase in value more than $10bn a year. “If Mr Bezos does not sell any of his
Amazon shares in a given year, the income tax ignores the $10bn gain, and
effectively he is taxed like a middle-class person making $80,000 a year”, Marr
tweeted.
In view of the supporters of the proposal, it
is not correct to argue that the rise in value of shares is totally notional.
The superrich are able to leverage their shareholding to borrow substantial
money to grow their wealth even more, giving rise to the already wide and deep
inequalities. In that sense, the rise in value of the shareholding is tangible
and could be taxed.
As per some estimates of the White House
economics team (see
here), the top 400 wealthiest families in the US paid federal taxes at an
average rate of 8.2 percent; whereas an average American citizen pays federal
taxes at an average rate of 14.6 percent. Therefore, apparently, the present
tax code is regressive and needs to be reformed.
Though the plan did not find favour with a of
majority law makers, there appears to be a strong popular support for such a
measure. As
per a Vox and Data for Progress poll, ‘71 percent of voters support raising taxes on
the wealthiest 2 percent of Americans to pay for the bill. Eighty-six percent
of Democrats and 50 percent of Republicans backed the idea. Other tax
provisions focused on the wealthy that could be included in the bill — such as
tax increases on corporations and capital gains — found 65 percent or more
support overall.”
It may be relevant to note in this context that
the concept of taxing the unrealized gains on investments is not new to the US
tax code. US taxpayers are taxed on their unrealized gains on the investments
in Passive Foreign Investment Company (PFIC), e.g., mutual funds, every year.
The unrealized gains on employees stock options are also taxed.
Context for India
Like the US administration, the government in
India has also embarked on a massive social sector and infrastructure building
plan. In the latest Independence Day speech, prime minister Modi had outlined a
Rs100trn Pradhan Mantri Gatishakti
Bharat Master Plan for integrated infrastructure growth. As part of the comprehensive Covid-19 relief plan, a Rs20trn Self
Reliance (AatmNirbhar India) program was also announced last year.
To muster financing for these plans and
mitigate their fiscal impact a number of measures have been proposed -
aggressive sale of public assets and hike in duty on fuel being the two
prominent ones. A committee has also reportedly proposed hike in duty on
cigarettes from the next fiscal year.
It was widely anticipated that the government
will impose some kind of surcharge on rich in the union budget for the current
fiscal FY22 to raise additional resources. However, the government refrained
from doing that.
The current status is that the sale of public assets has started to gain some momentum with privatization of Air India and scheduling of LIC public offer. This shall help in keeping the fiscal math balanced. We may not see the interest rates rising materially from the current level. The interest on savings shall also remain low, which essentially means stress for pensioners and small savers.The persistent hike in duties on fuel and cooking gas (except one major cut on Diwali) has also significantly impacted over a billion common people directly, or through a second round inflation impact.
The question now is what would be a better
course of action for the Government of India—
Should it consider taxing the superrich Indian
billionaires on their wealth and/or unrealized gains? Or
Should it continue taxing over a billion
commoners who are already struggling with Stagflationary conditions for the
past few years now?
Prima facie, the tax structure in India appears
to be progressive as the effective rate of tax on tax payers with taxable
income of over Rs10million being substantially higher than the tax payers in
lower income groups. Also a large majority of households have been kept out of
tax net by keeping the threshold higher. Less than 15million people in India
are liable to pay tax on their income. Even out of these 150million, about
100million report an annual income of less than Rs one million, and have an
effective tax rate of less than 20%.
Obviously, this debate does not suit the stock
markets and equity investors. Nonetheless, the issues are important and need to
be discussed objectively and intensively.
