Economists Call for Higher Income Tax Rate on Super Rich

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Jan. 10 – At a pre-budget meeting held on Monday with India’s Finance Minister P Chidambaram, the country’s leading economists proposed that a higher income tax rate for the rich be announced in the Budget for 2013-14.

Days before the pre-budget meeting, C Rangarajan, Chairman of Prime Minister’s Economic Advisory Council, said the government could consider levying a marginal tax rate higher than the current 30 percent on those with substantially higher income.

M Govinda Rao, Director of the National Institute of Public Finance and Policy (NIPFP), also mooted the idea to raise the top tax rate for super-rich in the country.

“Now you have a marginal tax rate of 30 percent for incomes above Rs. 8 lakh… after Rs. 15 lakh of income, it may be worthwhile having a tax rate of 40 percent,” he said in an interview with the Business Standard.

It is not surprising that governments tax their people more during difficult times. Last week, the United States legislation approved higher taxes on annual incomes over US$400,000 for individuals and US$450,000 for jointly filling couples. For India, the country is now facing a looming crisis as deficits in its fiscal and current account are spreading concerns nationwide.

The country’s current account deficit has already hit a record 5.4 percent of GDP in the July-September period last year, which is well beyond the 3 percent danger benchmark and much higher than the government’s target of 3.8 percent. Meanwhile, the country’s fiscal deficit rose to US$76.2 billion during the April-November period and the fiscal deficit target has been raised to 5.3 percent. However, according to some economists, even with a revised target, the country is still likely to miss it.

“Fiscal deficit cannot be contained by curbing expenditure alone; we must raise revenue as well. We have to think of not just administering existing taxes better, but also of new ones. Why can’t we think of having a rate of tax higher than the current peak of 30 percent on substantially higher incomes?” Rangarajan told the Economic Times in an interview.

However, not all economists are in favor of the idea. Pronab Sen, the former chief statistician, pointed out it is very difficult to tax high-income individuals at a higher rate in the country, as most of them have access to the global economy. “They could distribute assets in a way that authorities find it very difficult to get at.”

Rajiv Kumar, an independent economist who also attended the pre-budget meeting, worried that higher tax rate for the wealthy might scare investors away.

“At this point, the economy needs investments and a rise in taxes would disturb the investment environment,” he said.

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