The wealth tax India should learn to use - Hindustan Times
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The wealth tax India should learn to use

Jan 24, 2023 03:05 PM IST

A tax on wealth is often discussed, but has proven hard to implement the world over. Instead, India must focus on building a progressive and effective property tax system

In recent years, there has been one constant in the run-up to the Union Budget: The demand for a wealth tax in India. Unlike other populist demands, this one does not entirely eschew economic logic. In countries across the world, the distribution of wealth is far more concentrated than the distribution of income. Yet it is income taxes that fund State-led redistribution initiatives and welfare programmes.

Building an effective and progressive property tax system can reduce wealth inequality, improve urban services, and push up productivity and growth at the same time (PTI) PREMIUM
Building an effective and progressive property tax system can reduce wealth inequality, improve urban services, and push up productivity and growth at the same time (PTI)

While a tax on wealth seems an attractive idea, it is hard to put it into practice. The history of wealth taxes is largely one of failures. According to a 2018 report of the Organization for Economic Cooperation and Development (OECD), 12 countries belonging to this club of rich countries had a wealth tax in 1990. By 2017, this number shrunk to four, as most countries found it difficult to administer a wealth tax. The countries that retained wealth taxes also struggled to raise sizable revenues.

Economic theory suggests that taxes on wealth are likely to be more efficient than taxes on income. Yet, in practice, most countries struggle to mobilise revenues using wealth taxes. The reasons are not too hard to fathom. The wealthy export their wealth to other countries by acquiring foreign assets in jurisdictions without such taxes. Even in India, you can expect to see the super-rich set up “family offices” in low-tax destinations such as Singapore to protect their wealth from being appropriated by the State.

Wealth taxes often exempt contributions to charitable trusts and endowments, and this, too, becomes an escape route to evade taxes. Some among the wealthy use accounting tricks to hide their true wealth. Since changes in wealth are harder to track compared to changes in income, tax authorities often struggle to detect evasion in wealth taxes.

There is one big exception, though. Most rich countries are able to raise significant revenues by taxing one specific kind of wealth: Immovable property. Property taxes tend to account for a sizable chunk of revenues of local government bodies in most OECD countries.

As cities grow, the wealth they create tends to find its way into real estate, pushing up property prices. In cities with imperfect real estate markets and weak State capacity, the windfall gains are captured by a few real estate developers. In well-governed cities, local governments are able to tap into this wealth, and redirect a part of it for urban regeneration. Urban investments make cities liveable, foster equal opportunities, and attract potential wealth creators, creating a virtuous cycle of prosperity.

Across East Asia, governments have been able to capture rising land prices through a mix of effective property taxes and public ownership, using the proceeds for urban renewal. The Hong Kong government, for instance, was able to recoup an estimated 80% of infrastructure investments between 1970 and 1991 through public ownership and taxation of urban land. Even in parts of Africa, reforms in land and property tax systems have enabled some countries to raise property taxes manifold in recent years, according to a 2018 study by economists Paul Collier, Edward Glaeser and their co-authors.

Property taxes are harder to evade compared to other forms of wealth and inheritance taxes, global experiences suggest. Yet, India hasn’t paid enough attention to this revenue source. The 2016-17 Economic Survey of the Union finance ministry used satellite imagery to suggest that Jaipur and Bengaluru are collecting no more than five to 20% of their potential property tax base.

Things seem to have improved since then, as city administrators have begun embracing remote-sensing technologies to strengthen their property databases. Since 2017, several large Indian cities — from Pune to Chennai — have been able to multiply their revenues from property taxes, a recently released Reserve Bank of India (RBI) report on municipal finances suggests. Yet, as the report acknowledges, there is wide variation in revenue mobilisation across Indian cities. Even among the better-performing cities, there is significant scope in raising revenues further.

Indian cities and towns will be able to tap their property tax base effectively only if they have accurate cadastral maps and effective governance structures, a 2020 World Bank discussion paper by Rajul Awasthi and Mohan Nagarajan argued. They suggested that states should set up municipal revenue boards that would maintain property registers across cities and towns, and help local bodies regularly update data on property valuations.

The Union government can step in to provide the initial financing and technical assistance for such boards. It can also draw up a template for such boards and suggest a model property tax structure for cities.

Instead of embarking on a road to adventurism and imposing a generic wealth tax, the Indian State needs to focus on more targeted interventions. If countries with better tax administrations have struggled with wealth taxes, there is little reason to expect India to do better. India’s experience in levying wealth and estate taxes has been extremely disappointing in the past. Building an effective and progressive property tax system can reduce wealth inequality, improve urban services, and push up productivity and growth at the same time.

Pramit Bhattacharya is a Chennai-based journalistThe views expressed are personal

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