Every few months in India, someone says, “We need a wealth tax!”
And we’re not alone in this. It’s a global feeling, and some places are taking action.
In New York, there’s a new pied-a-terre tax on expensive property that the owners aren’t living in. California wants to levy a 5% tax on billionaires. And in the UK, Andy Burnham, the frontrunner for the post of Prime Minister has said the country has “overtaxed labour and undertaxed wealth”.
Everyone wants to tax the rich!
But does taxing wealth actually work? Or does it cause more problems than it solves?
Let’s take it right from the top and break this down.
So, income tax taxes what you earn. Capital gains tax taxes what you sell. Both are triggered by events such as a salary, a transaction. A wealth tax is different because it taxes the mere existence of assets, every single year, whether or not anything was earned or sold.
Think about what that means in practice. Say you own a large stake in an unlisted family business and it’s worth ₹50 crore on paper, but you haven’t sold a single share, haven’t received a dividend, and haven’t earned a rupee from it this year. A wealth tax says you still owe the government money. On the value of something you haven’t touched.
But to pay that, you’re probably going to have to liquidate something you own anyway.
It seems unfair, no? It’s just paper wealth. And that very aspect of taxing being wealthy is why this debate gets complicated very quickly.
Also, income tax is a progressive tax. Which means those who earn lower incomes pay a lower tax rate and the higher income people pay a higher tax rate. So we sort of already tax the rich.
Now each time someone proposes a wealth tax on the rich, two reasons come up almost every single time.
First, and the most argued about one is the problem of capital flight.
That wealth, unlike land or factories, is mobile. And wealthy people have options to move things around. So they’ll leave the country they feel is being unfair to them and move their assets outside to a more “tax friendly” country; which also means a loss of jobs as their businesses move.
A classic example is that of Ingvar Kamprad, founder of furniture company IKEA. He moved out of Sweden to Switzerland in the 1970s due to what he complained was a high wealth tax. And it was only after Sweden finally abolished it in 2007 that he moved back to his home country (although I have to add that he didn’t specifically say it was that which sparked his return — just put two and two together).
And in Norway, a small percentage increase in the wealth tax rate led to 82 rich people leaving in just 2022-23.
Then there’s the overall disappointment from revenue collection.
Take India for instance.
Yup, India actually had a wealth tax of sorts until 2015. The then Finance Minister Arun Jaitley killed it finally because he believed the cost of collecting the tax was higher than the revenue it raised. In its final year, the wealth tax contributed less than 1% to India’s total direct tax collection.
The administrative machinery needed to run and monitor the wealth tax cost more than the tax brought in. So India moved towards a simple surcharge on high incomes instead. It was just cleaner.
And other countries have seen something similar play out — a wealth tax doesn’t seem able to raise a mind boggling sum of money.
But, but, but…wealth inequality!
The World Inequality Report (pdf) points out that if you consider income inequality, the richest 10% of the global population takes home 53% of the income. And the poorest half earns just 8%.
But when you consider wealth (assets such as land, capital etc) the gap is even wider. The richest 10% of the world owned 75% of all wealth while the poorest half owned just 2% of the global total.
That difference is stark.
And there’s a man who made the world take wealth inequality a lot more seriously in the past decade. I’m talking about Thomas Piketty, a French economist, whose book Capital in the Twenty-First Century took the world by storm in 2014. Once it was translated into English, of course. But still, it’s a 700-page book on economics. And it was read by people in the real world too! Non-academics, I mean.
But for the purpose of our discussion here, let’s distill that massive tome of a book into its most simplistic equation which was also the central argument: r > g.
(r) is the rate of return on capital. And (g) is the growth of the economy.
So when Piketty says r > g, he means that if you already own capital or wealth — stocks, property, businesses — the wealth tends to grow faster than the economy itself. Which means the rich don’t just stay rich but they become relatively richer over time just by virtue of owning things. Not because they worked harder or were smarter but simply because they had capital to begin with.
And Piketty’s conclusion was that if left unchecked, this dynamic would lead to wealth being concentrated into fewer and fewer hands. He prescribed a progressive wealth tax to fix things.
You’d expect one of his former students to speak the same language too, wouldn’t you?
So it’s no surprise when Gabriel Zucman calls for a wealth tax. He says that billionaires — just 3,000 families in the world — pay only about 0.2% of their wealth in taxes. Simply because they find ingenious structures to minimise their overall outgo; whether through dividends or holdings companies. And all it will take is a global minimum tax of 2% on billionaires. He thinks it will generate $250 billion a year for governments, but more than anything else, he thinks it will create a sense of fairness.
“For the first time in decades billionaires would pay at least the same effective tax rate as nurses, teachers or secretaries, ending a situation where, in many countries, the very richest pay less than the middle class.”
And before you dismiss his views saying, “Oh, he’s another economist with idealistic views,” this is what Warren Buffett wrote in the New York Times in 2011:
Last year my federal tax bill — the income tax I paid, as well as payroll taxes paid by me and on my behalf — was $6,938,744. That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income — and that’s actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent.
If you make money with money, as some of my super-rich friends do, your percentage may be a bit lower than mine. But if you earn money from a job, your percentage will surely exceed mine — most likely by a lot.
Buffett wanted the rich to make a “shared sacrifice”. He wanted them to cough up higher taxes.
And honestly? It’s hard to argue with that.
Because here’s another stat from the same World Inequality Report:
Since the 1990s, the wealth of billionaires and centi-millionaires has grown at approximately 8% annually, nearly twice the rate of growth experienced by the bottom half of the population.
And closer to home, it’s the same story.
The richest 1% of Indians controlled 40% of the nation’s total wealth. And the poorest half of the country shares just 6% of national wealth. The numbers are getting wider.
Those numbers are probably why when Piketty came to India in December 2024, he didn’t mince words. He said, “India should be active in taxing the rich.” And called for a 2% wealth tax on people who had assets over Rs 10 crores. And a 33% inheritance tax on property of the same value. By his estimates, India could raise annual revenue worth ~2.75% of the GDP.
That’s roughly Rs 10 lakh crore!
To put it into perspective, that’s a little under how much we spend on capital expenditure (capex) — roads, manufacturing — in a year.
So you can bet that sort of money would go a long way in India.
Of course, the others who shared the panel with Piketty in India weren’t convinced and the usual answers were thrown around — the wealthy will leave the country etc.
But, is that really true? Or is it just a lazy answer to dismiss the debate altogether?
Well, some folks believe capital flight is a myth.
Cristobal Young who teaches at Cornell has a book titled The Myth of Millionaire Tax Flight; that title alone should tell you everything you need to know. But to save you the trouble of reading it, just know that he looked at data in the US to see if the rich move states due to wealth taxes, and he found that they don’t.
And I found this excerpt (pdf) from his paper so dramatic that I had to use it here:
Warnings of dramatic millionaire migration are a modern Ayn Rand novella: Resentful of taxation, the economic elite withdraw their services and abandon society. In contrast, we see little migration as a result of millionaire taxes. Earning power—even at the top—is not readily mobile. Millionaires are both socially and economically embedded in their states…
There’s other research from Europe that points in the same direction too.
Of all the countries that have tried this, Norway offers the most instructive case — because Norway hasn’t quit.
The country has had a wealth tax since 1892. And it’s not giving up on it soon. Despite millionaires leaving and people complaining the country is willing to deal with the trade off.
Norway doesn’t promise that rich people won’t leave. It accepts that some will. But it raises real revenue from those who stay and makes a judgment that the resulting society is worth it — one with one of the lowest levels of economic inequality in the world.
And sure, Norway has oil wealth, has an accepted socialist structure, and all of that. It can make this call. But whether other countries can, and more importantly for us, whether India can, is a different question.
A question that will keep popping up every now and again.
This newsletter is written by Nithin Sasikumar
Do read, “Retirement: Is saving 10% of your income enough?” in our Second Order newsletter.
For any feedback or topic suggestions, write to us at varsity@zerodha.com.
Sustainable growth comes from a balance of wealth creation, capital formation, and fair taxation. The discussion is more nuanced than it appears on the surface.
of course wealth tax has to be there! But why would politicians do it, they themselves are in the pockets of the wealthy!