Finance Minister Nirmala Sitharaman recently addressed the concept of "Robinhood Economics", emphasising the importance of wealth creation over redistribution. Her remarks come amidst a broader debate sparked during the Indian election campaign regarding the potential implementation of wealth and inheritance taxes to address economic inequality.
In an era marked by widening economic disparities and mounting calls for social justice, the debate over wealth tax and inheritance tax has ignited fervent discourse on the role of taxation in fostering economic equity and bolstering social security.
In the wild world of economic policy, few topics ignite sparks quite like wealth tax and inheritance tax. It's like watching a heated family dinner debate about who gets grandma's antique vase but on a national scale. And when you throw social security into the mix, it's taking the drama a few notches up.
The Veracity Of The Wealth Tax
At its core, this debate transcends mere fiscal policy. Rather than focusing solely on boosting revenue, it's crucial to scrutinise expenditure.
After all, even with increased revenue, the pivotal question remains: how will it be equitably distributed? This is precisely where the critical role of social security comes into play.
Instead of adding more taxes, which arguably raise concerns about the potential impact on entrepreneurship, capital formation, economic growth, innovation, and investment, we need to turn this idea completely on its head.
If we find that there is "wealth” to be taxed, and know that nobody likes more taxes, then what alternative ways are there to use this wealth for a more just and voluntary redistribution?
Taxation is coercion, except if you ask the government. People, especially the rich, are much more receptive to voluntary altruism and philanthropy.
According to this article, the number of Indian philanthropists contributing ₹5 crore or more to charity surged to an all-time high of 119 individuals in 2022-23, a significant increase from just 27 donors in 2016-17, donating ₹8,445 crore in FY23, up from ₹5,623 crore the previous year.
As per this report, private philanthropy has maintained an average growth rate of approximately 8% from FY 2017 to FY 2022. Corporate Social Responsibility (CSR), family philanthropy (including Ultrahigh Net Worth individuals (UHNIs) with a net worth above INR 1,000 crore, High Net Worth individuals (HNIs) with a net worth of INR 200–1,000 crore, and affluent individuals with a net worth of INR 7–200 crore), and retail giving together contributed around 86% of private philanthropy in India.
However, despite a 9% increase in cumulative wealth, UHNIs in India donate significantly less than their US, UK, and China counterparts. Retail giving accounting for just over 22% of total contributions, has grown modestly at 6% annually from FY 2017 to FY 2022 but is projected to increase at a faster rate of 9% annually, contributing approximately 29% of total private giving by FY 2027.
This funding disparity underscores the potential for private philanthropy to play a larger role in fostering inclusive growth and the need to facilitate this more easily.
The Role of Philanthropy in Social Security
As the landscape of philanthropy evolves, leveraging digital technology and engaging private entities can pave the way for innovative approaches to maximise the impact and reach of charitable contributions and revolutionise social security.
To this end, in a previous article, the author proposed something called a Multi-Contributor Social Security system (MCSS). Individuals can designate a bank account for MCSS, where contributions can be made by various entities including governments, employers, employees, philanthropists, individuals, and companies under CSR, with tax benefits for contributors.
JAM (Jan Dhan - Aadhaar - Mobile) trinity can facilitate widespread adoption. It would be divided into a long-term/special portion for pension and significant expenses, and a short-term portion for immediate needs like insurance payments, etc.
A small portion can be allocated for investments in mutual funds and government bonds with the aim of social security dictating minimal risk.
Contributors can search and select recipients based on criteria like age, income, and specific needs, with options to specify the purpose of the contribution. Individuals holding these accounts can also broadcast the category of their needs. MCSS accounts should be transferable and interoperable across providers to encourage competition while maintaining continuity.
To accommodate the system's complexity and enhance flexibility, it may be advantageous to implement it through a middleware or platform, potentially integrated into the India Stack open network. Alternatively, defining protocols, standards, and basic functionalities and allowing private sector entities to develop them could also be viable.
Can the Govt Implement Innovative Strategies?
Employing a middleware or platform approach would facilitate broader adoption throughout the ecosystem with banks seamlessly integrating into the network for additional functionalities. Additionally, integrating the MCSS unique id into the UPI/NPCI system would enable direct transfers to the underlying bank account using the MCSS unique id itself.
Digital platforms can modernise contribution systems while minimising administrative burdens and costs. In recent news, the Employees Provident Fund Organisation (EPFO) announced that it is planning a major revamp "to create an innovation-driven social security organisation… to extend universal coverage… through state-of-the-art technology."
But can governments be trusted to roll out smooth systems and not bungle things up? The Goods and Services Tax (GST) system and the revamped income tax portal are stark reminders of such failures.
This hybrid approach combines the strengths of both public and private sector initiatives, reimagining social security contributions as a means of promoting wealth redistribution.
This entire reimagined social security system is intended to make it easier for contributors to discover and connect with intended recipients and to create a system which is not tightly coupled with an employer or the government. Cutting-edge digital technology enabled by private sector participation must be leveraged to create such innovative systems.
As the curtain falls on this discourse, let's not miss the punchline: it's time to rewrite the playbook on wealth tax, inheritance tax, and social security contributions.
(The author is a Research Scholar at The Takshashila Institution, Bangalore. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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