There is far more to reducing inequality than taxing the rich

French economist Thomas Piketty’s insights on global inequality are useful, but he is not quite our pole star

There is more to reducing inequality than taxing the rich

French economist Thomas Piketty does a major service by focusing public attention on the problem of inequality — of income and wealth. India is one of the most unequal countries in the world, even as it is marginally better placed than South Africa.

The rich world, Western Europe and North America, are decidedly more equal than India, and so is China. The greater purchasing power in the hands of the non-rich is, arguably, a factor driving their economic growth. Does this, then, mean that India should listen to Piketty’s advice and start taxing the wealth, and not just the income, of the super-rich, to reduce inequality, directly, by taxing away the wealth/income of the rich, and, indirectly, by using the proceeds of taxation to improve governance and the delivery of public goods? The short answer is, NO!

Let us note, at the outset, that inequality is injurious to social cohesion and a shared sense of the system being just and fair. Every Indian is supposed to be equal before the law. Let us consider two strictly fictional litigants suing each other, Daridra Narayan, who lives in a slum, and Mukesh Adani, who is very wealthy, and lives many splendid feet above the sea level. The case comes up for hearing. Rule out all extraneous considerations, such as the judge or concerned police personnel being bribed or the judge receiving an indication from God, via dream delivery, as to which way he should rule. Would the two truly be equal before the law? Mukesh Adani can take every single lawyer worth his salt on retainer, and deprive Narayan of the services of a competent lawyer. He can defer the hearing endlessly, draining Narayan of funds, with which to pay legal fees, as well as of the time he can spare from earning his daily bread. Great disparity in income can vitiate other kinds of equality as well.

Does this not suggest that ending income inequality should be the principal policy priority? It does not.

When Daridra Narayan wakes up in the morning, he does not start worrying if, that day, the income gap between him and Mukesh Adani is going to widen. His main concern is that he should be able to earn enough to feed his family, educate his children, buy medicines for his mother, and tuck away a little something to reclaim from the pawnbroker the little bit of gold his wife had brought with her.

The dynamics of growth and inequality play out very differently in countries with absolute, subsistence poverty and countries that only have relative poverty. Absolute poverty spells drudgery, mental and physical stunting, and incapacity to aspire beyond day-to-day survival. Absolute poverty degrades human beings, deprives them, and the larger society, of their creative potential, and pulverizes a chunk of potential economic output.

The primary goal for a country like India with absolute poverty is to remove it, and emancipate those caught in its maw into full humanity. If the fastest end to absolute poverty is to be achieved by growth that sharply widens income and wealth inequality, it is such kind of growth that the country should embrace, rather than a strategy of growth that lessens income inequality, but also reduces the pace of poverty reduction.

Let us note that ending poverty and moving ahead in life is not just a function of economic growth. A redistribution of social, political and cultural power to nurture those emaciated on these counts is vital. Today’s rich world, let us note, are all post-revolutionary societies. The French had their famous revolution. The English beheaded a king to assert the rights of the people via Parliament. Most of Europe saw revolutions demanding universal adult franchise.

Those who settled North America to form the United States were rebels, to begin with. They fled religious and political oppression back in the old country. Later, they fought their colonisers, to secure freedom. The Declaration of Independence boldly proclaims: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.—That to secure these rights, Governments are instituted among Men...” Slaves were, of course, property, not men, and native Americans were savage obstacles to the civilized pursuit of happiness.

A largish proportion of the 13 colonies of Britain that declared Independence took part in the fight for freedom, suffered hardship, and paid for the war, even if they did not take up arms. Freedom and empowerment were hard-fought achievements in Europe and North America.

China, lest we forget, also staged a revolution, to break up feudal power and authority, before it began its embrace of capitalism after Mao. Japan and South Korea also saw thorough-going land reforms and associated redistribution of political and economic power, after World War II.

Indians did not fight local oppressors to win their freedom and redistribute economic and social power, except in a few places like Kerala, Kashmir, and, to a more limited extent, parts of the Madras Presidency. In West Bengal, the Communist movement did not really empower the people, but trained them to seek patronage, first from themselves, and later, from their successors.

Most of North India retained traditional power structures — of caste, land ownership, and cultural exclusion of the subaltern. Development is understood by most Indians as delivery by an enlightened state of dollops of healthcare, education, and social security, even as the recipients remain passive, inert objects of policy, when not of traditional exploitation. There is consensus on this across the political spectrum, leaving aside the Left, which has marginalized itself into irrelevance with its dogmatic opposition to globalised growth. Economists like Piketty would appear to share this consensus, political empowerment not being on their policy radar, coming as they do from post-revolutionary societies that have secured democratic empowerment of the citizenry.

Political mobilization, such as has taken place in North India, has pursued sectarian ends such as nursing grievances and fostering animosity between sections of the people, destroying the very solidarity essential to forge the sort of empowerment that reduces gross, multidimensional inequality.

What is wrong with taxing the rich to mobilise the resources the state needs for effective governance? After all, the tax/GDP ratio is only 17% in India, half the OECD average. The trouble is that the rich are footloose in the modern world. Higher taxes selectively on the rich can make them shop around for citizenship in low-tax jurisdictions. Since India welcomes foreign investment, they can cease to be taxed in India altogether while continuing to do business in India. But they might choose to expand abroad. It is better to keep tax rates stable and improve tax analytics and administration, to boost collections, while keeping India attractive to entrepreneurs. This is where Piketty’s endorsement of the proposal by OECD, and later, the G20, for a global minimum tax is most welcome.

The task of organizing people to redistribute social, cultural and economic power is not a task for governments, but for political parties. How they would go about it would be the factor that sets one party apart from another.

Globalised growth has, indeed, widened inequality within countries. For entrepreneurs, markets turn global, the supply of capital is global, the sourcing of talent and technology is global. They do very well. Work migrates to low-cost centres that can deliver the kind of work required. Workers in higher-cost jurisdictions lose out. Their incomes stagnate, even as entrepreneurs see their incomes zoom. Inequality grows. In countries like India and China, to which work gets outsourced, incomes go up for those who get to take part the outsourced work. Their income disparity vis-à-vis those who are still stuck in rural under-employment worsens.

At the same time, the income gap between the rich nations and the rest narrows, to varying degrees. The per capita income in China, after a significant degree of convergence, is still only about 15% of the US per capita income. But the cumulative income of those 1.4 billion people has let China emerge as the world’s second most powerful military. This matters, from the point of view of geopolitical strength and national autonomy.

The sensible course for India is to empower the people, to enable them to participate in broadbased globalized growth, free everyone from poverty and its restraining thrall, grow fast and acquire national power. Piketty is useful, but not quite our Pole Star.