A new system of taxation that encourages economic growth and meritocracy, even while redistributing wealth and doubling the Government’s revenue. That’s what William Nanda Bissell of Fabindia proposes in ‘Making India Work’ (www.penguinbooksindia.com). “I propose a system where ‘unearned profits,’ such as from inheritance and property, are taxed, and wages and productive activities are not,” he writes, in a chapter titled ‘Ending poverty.’
Bissell classifies taxes not as direct and indirect but as good and bad. In the latter category are taxes on income and profits, since they penalise productivity. These taxes, which are often advocated as a means to redistribute wealth and limit corporate power, do not work, he avers. “This is because the bulk of wealthy individuals’ prosperity does not come from wages, but from dividends and capital appreciation.”
Another ‘bad’ tax, according to him, is the one on transactions, in the form of sales tax, octroi, excise duty and so on. A telling example in the book is a comparison between manufacturing furniture in India and importing the same from China or Malaysia. You can be punished with almost 50 per cent of tax for creating jobs and building the economy, the author cautions. “It would be easier to import the furniture and get an obliging exporter in Malaysia to under-invoice the shipment.”
In the opposite, the ‘good’ taxes Bissell would like to be levied include a thirty per cent asset transfer tax at the time of death, applicable to ‘assets above a threshold of a thousand times the per capita GDP.’ Without such windfall taxes (which, however, will not affect 99.9 per cent of Indians), the Government deprives itself of income and creates a powerful privileged elite who can manipulate democratic institutions, he argues.
“In India, major shareholders own much, much more than in the US (because of high estate taxes). Giving this small elite such a huge amount of economic power poisons democracy. It also creates inflated stock prices as market capitalisation is based on only a fraction of shares being traded…”
A one per cent annual property tax is another way to limit the power of the ‘inheritance elite,’ he reasons. ‘With zero opportunity cost to holding property and land values sky-rocketing,’ places such as Landour, Mussoorie, are full of absentee landlords and empty houses, the author rues. “At the same time, it is impossible for people who contribute to the local economy to afford living there.”
A saner form of property taxation, Bissell expects, will compel people to use banks rather than real estate for their deposits, and lead to a dramatic fall in property prices. He recommends the creation of a National Cross-Subsidisation Fund, which will receive all property tax revenue above Rs 50,000 per resident (as from Panchsheel Park in New Delhi, or Malabar Hill in Mumbai, for example), and use the same for poorer areas such as Sewari.
Yet another proposal in the book is of a one per cent economic activity tax – ‘electronically taken off any transaction, from sales of goods and services to the transactions of investment funds.’ This tax would be progressive, because the rich move larger sums of money and their money tends to move faster and more frequently through the economy, Bissell explains.
Since ‘the velocity of money (the volume and frequency of transactions) is taxed, not its productivity (profits or wages),’ he foresees that the tax would make short-term transactions costlier and reduce the volatility, considering the increasing discrepancy between the levels of financial trading transactions and the levels of ‘real world’ transactions.
Bold insights worthy of discussion.