- In 2022-23, India’s top 1% earned 22.6% of the national income, a figure higher than even the US, underscoring the deepening wealth inequality. As a solution, a wealth tax is proposed to curb this disparity by taxing individuals’ net assets. While supporters argue it can reduce inequality and improve tax buoyancy, critics question its administrative feasibility, fairness, and overall effectiveness in practice.
Wealth Tax: A Conceptual Overview
- Wealth tax, distinct from income tax or GST, focuses on taxing accumulated assets like property, stocks, bonds, and asset transfers, providing an additional revenue stream for the government.
- Introduced in India in 1957 based on the Kaldor Committee’s recommendations, the Wealth Tax Act (WTA) applied to individuals, Hindu Undivided Families (HUFs), and companies (excluding non-profits, co-operatives, social clubs, political parties, specified Mutual Funds, and the RBI).
- It was levied on net wealth on the last day of the financial year. However, the tax was abolished in 2015 due to challenges such as high litigation, increased compliance costs, administrative burdens, and inadequate revenue generation.
Wealth Tax and Economic Inequality
- Addressing Wealth Concentration: Taxing wealth alongside income can reduce inequality and promote social justice by ensuring that wealthier individuals pay higher taxes, funding public goods and services that benefit society.
- Mobilisation of Domestic Resources: Wealth taxes can generate significant revenue for investment in education, healthcare, infrastructure, and sustainable development, with estimates suggesting a 2% tax on India’s billionaires could fund the annual education budget.
- Correcting Market Failures: Wealth taxation helps reduce inequality and fosters market efficiency, creating a more stable economy and a robust investment environment.
- Stemming Political Capture: Taxing wealth can reduce the influence of the wealthy over political institutions, countering monopolies and promoting democratic fairness.
- Promoting Social Equity: A wealth tax discourages the hoarding of unproductive wealth, encouraging investment in productive sectors that benefit society.
- Boosting Economic Growth: By redistributing wealth, taxing the rich can stimulate demand and promote more decentralised economic growth.
- Complementing Existing Tax Systems: Wealth tax supplements income taxes, promoting progressive tax systems and reducing the burden on personal income taxes.
- Addressing the Climate Crisis: A wealth tax could reduce extreme wealth accumulation, which is linked to higher environmental pollution, thus contributing to efforts to combat the climate crisis.
Impact of Economic Inequality
- Social Unrest & Political Instability: High inequality breeds social unrest, protests, and political instability, as marginalised groups feel excluded and disenfranchised.
- Reduced Social Mobility & Human Development: Economic disparity limits access to education, healthcare, and opportunities, hindering upward mobility and stalling overall human development.
- Environmental Degradation: Wealth concentration leads to overexploitation of resources, prioritising profit over sustainability, which accelerates environmental damage.
- Perpetuation of Poverty: Inequality keeps wealth in the hands of a few, trapping disadvantaged groups in a cycle of poverty and deprivation.
- Slower Economic Growth: Inequality restricts access to resources for the majority, reducing human capital utilization and slowing inclusive economic growth.

Credit: Statista
The Indian Context
Inequality Statistics
- According to the World Inequality Report 2022, India’s top 1% controls 22.6% of national income.
- The Oxfam Inequality Report 2023 states that only 5% of Indians own 60% of the country’s wealth.
- The World Inequality Lab Report 2024 suggests that a 2% super tax on the 167 wealthiest families could generate 0.5% of national income, providing fiscal space for welfare investments.
Policy Considerations
- Reintroducing a wealth tax in India could help reduce inequality and generate revenue for welfare schemes like PM-KISAN and MGNREGA.
Alternatives to Wealth Tax
- Inheritance Tax: Taxing inherited wealth targets intergenerational transfers without affecting current investments.
- Capital Gains Tax Reform: Addressing loopholes in capital gains tax could increase revenue without a direct wealth tax.
- Luxury Tax: Higher taxes on luxury goods could reduce wealth concentration by targeting consumption patterns.
Global Experiences with Wealth Tax
- France: Abolished its wealth tax due to economic inefficiencies and significant capital flight.
- Norway: Maintains a wealth tax with a design that minimises excessive burdens on the middle class.
- United States: Wealth tax discussions face resistance, primarily due to concerns over asset valuation, enforcement challenges, and potential negative economic consequences.
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Challenges of Wealth Tax Implementation
Efficiency and Administrative Feasibility
- Political Influence: Wealthy individuals may exploit exemptions or move assets abroad to evade taxes, reducing effectiveness.
- Complex Asset Valuation: Valuing diverse assets like real estate and unlisted shares is difficult, leading to disputes.
- High Collection Costs: Administrative costs often outweigh the revenue, as seen in India’s 2015 abolition of wealth tax due to low returns.
- Tax Evasion: Loopholes, tax havens, and asset shifting undermine the tax’s effectiveness.
Economic Efficiency
- Impact on Investment: A wealth tax may reduce incentives for entrepreneurship and reinvestment, slowing economic growth.
- Capital Flight: Wealthy individuals may relocate assets to countries with lower taxes, as seen in France.
Equity Concerns
- Double Taxation: Taxing both income and wealth may prompt individuals to change residency or increase litigation costs.
- Disproportionate Burden: Middle-income households with illiquid or low-return assets may struggle with wealth taxes.
Ethical and Social Dimensions of Wealth Tax
- Moral Justification: A wealth tax is ethically justified as a means to ensure the wealthy contribute fairly to society, especially in the face of significant inequality.
- Social Contract: Wealth taxation aligns with social contract theory, emphasising collective responsibility for societal well-being. Reducing inequality strengthens social cohesion & reduces class-based tensions.
- Balancing Rights and Responsibilities: While the wealthy have the right to retain their earnings, their responsibility to contribute to social welfare must be balanced through equitable taxation.
Recommendations for Effective Implementation
- Progressive Design: Implement a wealth tax targeting ultra-high-net-worth individuals (net worth above ₹25 Crore), while exempting middle-class households and small businesses.
- Efficient Valuation Mechanisms: Use technology and transparent guidelines for asset valuation to streamline processes and reduce disputes.
- Global Coordination: Collaborate with global organizations like OECD to combat tax evasion and capital flight, ensuring more effective wealth tax enforcement.
- Public Awareness: Educate citizens on the purpose and benefits of wealth tax to promote compliance and acceptance.
- Pilot Projects: Introduce wealth tax in select sectors or regions as pilot programs to assess feasibility and effectiveness before nationwide implementation.
A wealth tax, if carefully designed and effectively implemented, has the potential to reduce inequality and mobilize resources for social welfare. By integrating it with complementary measures and drawing from global experiences, India can create a balanced approach to wealth redistribution and sustainable growth.
Reference: livemint
PMF IAS Pathfinder for Mains – Question 44
Approach
- Introduction: Define wealth tax and its purpose in the context of economic inequality and why wealth tax is considered a potential solution to it.
- Body: Highlight Wealth Tax to be a tool to address Economic Inequality, the challenges in implementing it, and how it can align better with efficiency and equity.
- Conclusion: Summarise the role of the tax in addressing inequality while acknowledging its challenges.
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