More taxes will drive capital away, says CEA Anantha Nageswaran

CEA says more taxes can drive capital away

Ideas like wealth tax or more taxes on capital will drive capital away, Chief Economic Advisor (CEA) V Anantha Nageswaran said at the Inequality, Economic Growth, and Inclusion conference held by Research and Information System for Developing Countries (RIS) in conjunction with the Delhi School of Economics on December 13.

“If you raise taxes, it would lead to wealthy fleeing the country as capital is mobile,” CEA said, in response to a suggestion by famous economist Thomas Piketty’s idea of a wealth tax.

Piketty in his presentation suggested that inequality in India was higher than most other countries and that a wealth tax was needed to correct some of the imbalances. Drawing from one of his studies earlier this year, he pointed out that a wealth and inheritance tax will help generate revenues, which can be ploughed back into health and education for better outcomes.

“Taxing capital more will drive capital away, and it's easier to drive capital out than bringing it back in,” the CEA noted.

While Piketty harped on the idea of reduction of inequality as a means to achieve higher growth, Nageswaran pointed to data from the PRICE Household Surveys showing that post Covid, the recovery has been more egalitarian.

“Post COVID, the rate and direction of change show that income for lower two quintiles have done better than top quintiles,” he highlighted.

Nageswaran also noted that income between social groups had also converged during this period, dismissing the view that certain social classes were doing better.

Rather he highlighted the rise in SIPs from India.

“There has been a democratization of stock market investment in the country. People with even less than Rs 1 million income are investing in stocks,” he pointed out.

Shamika Ravi, member of the Prime Minister’s Economic Advisory Council, on the other hand, highlighted that for a country like India growth was sacrosanct and that the idea of foregoing growth for equality did not conform to emerging countries.

She used examples from the recently released Household Consumption Expenditure Survey 2022-23 to show that consumption inequality had reduced across both rural and urban areas, with expenditure on items like fruits and milk rising.

“Growth for us is non-negotiable,” she noted.

The event also had former RBI board member Ravindra Dholakia as a panellist, who highlighted the problems in using income tax data, which Piketty’s research has done, to show that Piketty’s data doesn’t take into account tax evasion.

CEA, in his presentation, also pointed out that policy could have asymmetric effects. “Enforcing equality through regulation hurts micro and small businesses more, given their limited management and financial bandwidth,” he said.