It’s easy to get fascinated by Prof Thomas Piketty, and his arguments. A French economist who has done groundbreaking work on inequalities, he passionately defends what he advocates i.e., tax the wealth of billionaires, and spend the receipts in health and education for the poor. Who can disagree? But then, there are many arguments and probably merit too, in not doing so. In an interview with The Indian Express, Piketty, who teaches at the Paris School of Economics, says not taxing top 500 or 1,000 billionaires may leave a country in a low productivity trap, and not manoeuver space to expand the tax base.
Q:How does the inequality debate translate to India? Particularly given its population, where almost 800 million – more than the combined population of Europe, are provided free foodgrains, and every family below the poverty line has got health coverage.
A: You mentioned health coverage, but the quality of health coverage and the quality of health services in India is not as large as it could be. So if we look at the general level of health services and health spending in India, I think this is certainly one area where India could do a lot better. So if you compare India to countries that were as poor as India 50 years ago, like China, for instance, China has been spending a lot more on health and education than India over the past 50 years. And I think that’s a big part of the explanation for the greater success and the rising productivity of China as compared to India. To increase productivity, you really need to invest more in education, public infrastructure, than what India is currently doing. And I know that India has been making progress. Government officials are always very defensive and say, we are doing this and that. And I understand, but it’s just that other countries have been doing more. I hear that making it easier for employers to conduct their business is going to increase the productivity of India. You know, if that was true, that would be very simple. But I don’t think this is true. I don’t think you’re going to close the productivity gap with China with this kind of decision. That’s all I’m saying, that’s a broad conclusion.
Q: Given the huge youth population in India, isn’t it about inequality of opportunities than inequality of income?
A: Yes, the two are always very, very strongly related, because when you have very unequal school opportunities, health opportunities, very unequal distribution of assets and therefore inherited wealth between people, you have at the same time a big inequality in opportunity, and big inequality in income and outcome. So this all comes together.
Q: Doesn’t the stage of development of a country matter when you advocate taxing the wealth of the rich?
A: Yes. Sometimes I hear we should wait that we become richer before being concerned about inequality and that inequality is a sort of rich country privilege or a rich country concern. But this is not what history tells you. What you see in history is that in fact, if you don’t reduce inequality early, you are stuck in some kind of low productivity trap where a large part of the population don’t have access to the basic goods and opportunities and assets. That’s a tool to make it possible for them to contribute to growth. So again the example of China. It went for relatively more equal distribution of educational spending, health spending, public infrastructure, as also more distribution of income. And this came with bigger growth, starting from the same very low level 15 years ago.
Q: Any populist government would like to do this. There probably are good reasons they don’t.
A: I’m not saying we are going to solve every problem in India. I work on distribution of income and wealth. I know ultimately we will need to expand the income tax from 10% of the population to 20% to 30% to 40%. That’s the only way to pay for everything that we need to pay collectively. But we will not be able to go in this direction if we don’t start by making it very clear that everybody is subject to the law. Look, these things change. You have big ideological waves in world politics. At some point, I think Reagan (US President Ronald Reagan) tried to convince voters that by taxing less the rich, maybe inequality is going to rise, but the size of the pie is going to rise so fast that the average income and average wages of average Americans is going to grow. Now, 30 years later, this did not quite work this way. The average American worker is very unhappy about globalisation and this has transformed the Republican party, which instead of being ‘optimistic Reaganian’ has become ‘Trumpist xenophobic’.
Q: In India, post 1991 liberalisation, parties across the political spectrum, have been steadfast on reforms. But over the last more than three decades, state spending on welfare too has increased, from free foodgrains to healthcare to even cash handouts to women. All such spending comes from taxes and borrowings. A redistributive tax on top of this may end up hurting businesses, particularly when they are expanding capacities, plugging themselves in global supply chains, and needing large capital for all this.
A: So right now in India, total tax revenue are about 13% of GDP. You see that all rich countries have at least 30%, if not 40%. If the right recipe to become rich was to have 13% of tax in GDP, India would be the richest country in the world. I’m sorry, but there’s something that I miss in this reasoning because, again, if low tax was the right recipe, India would be the world champion. And India is not the world champion. But it’s not just in India that things don’t work this way. If you look in Europe, the low-tax countries in Europe are Bulgaria, Romania, Albania, and the high-tax countries are Sweden, Denmark, who have 45-50%. So if low-tax was the recipe, Romania, Bulgaria should be richer than Denmark and Sweden, which they are not.
So, you know, it depends what you do with your tax revenue. I mean, if you have a big tax and do stupid things with your big tax, probably that’s not going to help. But what we see around the world is that usually, you know, big tax capacity comes with the building of collective capacity to monitor the public spending and this helps growth and increasing growth. Now it’s not easy, these processes take time. Countries have, if you say Sweden and Denmark, they had less than 10% of the European tax revenue before World War I and it took many many years. I’m not trying to say that it’s easy. Because it’s all a collective capacity of monitoring the right spending that is at stake. Sometimes I could certainly agree with you that some promises that are being made by particular politicians are not very useful spending. So it’s a collective capacity to monitor spending and monitor taxes that is at stake. And that’s certainly not easy. But at the end of the day, there’s no other solution than to try to make it work.
Q: In a developing economy like India with low per capita incomes, wouldn’t such redistributive tax sacrifice growth by taking away capital that could be invested for productive purposes, for generating employment or for expanding the manufacturing base. There is merit in this argument, isn’t it?
A: If the total tax revenue in India was 80% of GDP, yes, there would be a lot of merit to that argument. With 13% of GDP, I think what’s missing for India’s growth is public infrastructure, public capital, human capital. If it was enough to keep 80% of GDP in private hands to have a lot of growth, you would already be a very productive economy because you already have very low tax. So there’s really something that doesn’t work in this reasoning. I mean, if you compare with other countries, you have one of the lowest tax revenue in the world.
Q: How do you interpret the impact of political cleavages over the last 75 years vis-a-vis inequalities?
A: India has been building a party system which is very peculiar and very specific to India. In some other dimension, it looks a lot like a sort of class-based conflict, or a left-right political conflict in the sense that higher education, higher income group, higher caste group vote a lot more for BJP, and lower education, lower income, lower caste vote a lot more for Congress and its left allies. India, unlike the West, looks left-right. So that’s interesting, and to me this will open the door for a possibility in future elections of maybe more redistribution in India.
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