Rich people must pay higher taxes to end income inequality

Jaipur: To strive towards ending income inequality, it is imperative the tax structure be reformed to raise the tax to GDP ratio, which would also entail the world's rich agreeing to higher taxes, including in India, says renowned French economist Thomas Piketty.

He also advised India not to depend much on foreign inflows and shift from caste-based reservations to those based on income for creation of equal opportunity, needed for an equal society.

Noting that tax structure was one of the great drivers of inequality in an economy, Piketty, a professor at the Paris School of Economics and at the London School of Economics' new International Inequalities Institute, said it must "undergo real reformation" so that the tax to GDP ratio increases.

In order for income inequality to end, it was essential that the world's rich agreed to pay higher taxes, including in India.

Indian elites have to accept that they have to pay higher taxes, he said at a session titled "Capital" at the Jaipur Literature Festival on Saturday.

This would allow more money to enter the government treasury, and be re-invested in public welfare, such as education and health services that everyone could access, leading to a "redistribution of wealth", said Piketty, the author of "Capital in the Twenty-First Century", a seminal work on the global dynamics of income and wealth distribution, including those leading to such inequality.

US writer and journalist Sebastian Mallaby agreed with him on the benefit of more money flowing into the government treasury for utilisation on public welfare goals, noting that lack of schooling and health care reduced the potential for growth in an economy, because without these basic goods, a person cannot find employment and so no income can be generated.

Piketty also sounded a note of caution as far as regarding foreign capital was concerned, holding no economy should become "too dependent" on capital inflows from other countries, as this could lead to public debt to foreign governments, which could later be exploited for political gain

Piketty also stressed the need for the "democratization of economic knowledge" which, in his view, would result in "democratization of the economy", a crucial step towards ending inequality.

"More transparency of information was needed if the general public was to bridge the existing information asymmetry," he said.

Mallaby, the Paul A. Volcker Senior Fellow for International Economics at the Council on Foreign Relations also concurred here, as "knowledge of financial markets and access to investment opportunities would bring increased returns on people's financial resources, which they could then re-invest, creating a virtuous circle for the economy"

India's Chief Economic Advisor Arvind Subramanian, who was also participating in the session moderated by academician Pratap Bhanu Mehta, observed that in the last few years, poorer countries like India have started to catch up with richer nations like America, in terms of the growth rates of their national incomes, but as far as India was concerned, it was not just income inequality that needed to be considered, but other concerns such as historical caste and class-based inequality.

Piketty agreed, highlighting the need for change in the parameters for reservations in governmental institutions, from being caste-based to being income-based to help create equal opportunity, essential for an equal society, while there must be equal access to education and employment too.