Rationale for Taxation

 A recent paper published by a team of economists led by Thomas Piketty (https://wid.world/.../WorldInequalityLab_WP2024_09_Income...) on the huge rise in inequality in India and their suggestion of taxing the rich to reduce this has led to a huge push back with people saying that it is the rich who create wealth and they should not be penalised through taxation. These people forget that redistribution of incomes through taxation has been a settled principle of all major economies since the 1930s because of very sound reasons. It would be helpful to go through these reasons which are as follows -

1. A modern economy has many enterprises which compete with each other to sell their products in the market and this leads to cutting of costs to stay competitive. Consequently, all enterprises tend to cut both material and labour costs. Cutting of material costs devastates the environment and labour costs are cut by paying low wages. Cutting of labour costs is also achieved by mechanisation which reduces the demand for labour while at the same time increasing the demand for materials, thus further devastating the environment.

2. The low wages of most employees in the economy, with some being unemployed or under employed, results in low effective demand for goods and services. This leads to recession in the economy and markets are flooded with goods and services that do not find buyers resulting in an over production crisis. Simultaneously, the devastation of the ecosystem results in the production of goods and services itself being jeopardised which can be termed as a production crisis. Thus, an unregulated competitive economy will eventually collapse due to an over production crisis combined with a production crisis.

3. This is what happened in 1929 across the USA and Europe and so the modern states thereafter stepped in to regulate the economy. An elaborate system of regulation was put in place to ensure that there is fair competition, wages are just and the ecosystem is not devastated indiscriminately. Moreover, the State in any economy is the biggest spender, not only in buying goods and services and developing infrastructure but also in providing subsidies of various kinds, especially in education, health and welfare, which ensures that the effective demand is kept at a level that counters recession. Apart from this the State maintains law and order and provides external security so that the economy can function smoothly. The state also protects the right to property without which the market cannot function and wealth cannot be accumulated by the rich.

The State has to garner the resources for this necessary regulation of and investment in the economy from taxes. The proportion of taxation in all developed economies currently is 40% of the GDP or more whereas in India it is only 12%. Therefore, the rich need to be taxed much more than they are being at present in India!!