The recent report of the Standing Committee on finance has engineered a sharp discussion on the merits of a tax hike on the rich in India. Former RBI governor Mr C Rangarajan has opined, possibly on the basis of the “findings” contained in the report, that perhaps India needs an inheritance tax along the lines of the US. Indeed, it can be argued that the Indian glitterati and perhaps even the policymakers take their cue from happenings in the US. That the US debate on economic matters should be of considerable interest (and introspection) to all of us is beyond question. The US is both the lead economy and certainly the “lead” economist in the world. Many of the most talented economic thinkers and policymakers in the world have been trained, and trained rigorously, in the US. So you know where I stand in learning from the US.
But it should be abundantly clear to most, if not all, that on taxation matters, particularly individual taxation, the US is the worst country to follow. Their system is broken, and all the US manages to do with its direct tax code is apply band-aids at every opportunity. The US does the same in its lame attempt to remedy its antiquated and repressive and regressive and obscene lack of laws on gun control. The US does need to address issues of inequality and taxation and gun control—it does not at all follow that we, or anyone else, have to do the same.
We have enough problems at home without worsening our balance by importing some from abroad. If we have to change the Direct Tax Code; it has to be based on something considerably more rational than aping the US. The table documents the data presented on page 40 of the Standing Committee report.
Some peculiar results. It seems reasonable to assume that the average income in each slab is equal to the mid-point of the range. This rule obviously does not apply to the top bracket, >R20 lakhs, about which more below. If average income is known, then the effective tax paid by the average person in each slab can be derived. And this is where difficulty begins and credibility ends—the effective average tax rate for the R5-10 lakhs category is 16.4%. Given our tax laws, and deductions, this rate should be around 11%. The discrepancy is very large; if true, it suggests