Rahul Gandhi, and the economics of ‘soaking the rich’

What’s he done now?

It’s not about what he’s done: it’s about what he says his party will do if it returns to power in 2019.

And what might that be?

At the recent plenary session of the Congress, the party adopted an economic resolution that, among other things, pledged to impose a 5-per cent cess on the incomes of the richest 1 per cent of Indians.

So what’s wrong with that?

We’ll get around to the philosophical arguments on the merits of taxation in just a bit. But at the most superficial level, this is just the latest unimaginative manifestation of a ‘tax populism’ mindset that has policymakers in India in thrall. If you’re seen to be ‘soaking the rich’ — by imposing higher taxes (and cesses) on them — you’re seen to be doing your bit for the poor. To be fair, it’s not just a Congress affliction: it happens across the political spectrum.

Not with the ideological right, surely?

On matters of economic policy, there isn’t a truly right-wing political formation in India. Specifically, in the game of ‘socking it to the rich’, the BJP is more than a match for the Congress. Recall that when all the defences of demonetisation failed, the only strand that the BJP profited from electorally was the narrative it advanced that while the note-ban may have inconvenienced the poor, it had made the rich folks line up outside banks.

But isn’t it fair that the rich pay more tax?

The spirit of that notion is at the heart of a progressive taxation system. But the history of taxation excesses — abroad as much as in India — is riddled with many instances of similar ‘soak the rich’ efforts that failed. The merits of these measures are typically overstated, and other than scoring populist points, little is accomplished. Remember, the peak income tax rate in India in the 1970s was effectively 97.75 per cent. That takes away any incentive to earn beyond a threshold.

That’s different from what’s now being proposed…

Sure, but the mindset is the same. It validates former US President Ronald Reagan’s folksy observation likening the government to a baby’s alimentary canal “with an appetite at one end and no sense of responsibility at the other.”

But resources need to be raised for development…

Yes, but the effort to boost overall revenues is advanced better by expanding the direct tax base. And in any case, advancing equity through the tax structure addresses only one half of the challenge: just as important as determining where the money comes from is directing it productively.

My head agrees with you, but my heart doesn’t.

The conflict is understandable. After all, fairness is not an economic concept; it has its roots in the realm of philosophy. But at the other extreme, the libertarian philosophical school believes, somewhat more provocatively, that “requiring the rich to pay more just because they are rich is little more than officially sanctioned theft.”

Whoa!

Yes, and in a seminal essay “The Uneasy Case for Progressive Taxation”, published in 1952, Walter J Blum and Harry Kalven Jr, scholars in law and taxation at the University of Chicago, conclude that “the most distinctive and technical arguments advanced (on behalf of progressive taxation)... are its weakest.”

I guess none of them had to contest elections...

True, but that’s not to say electoral politics should always be underwritten by lazy economic populism.

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