Tax capital income, avoid wealth, inheritance levies to support investment, says economist Daniel…

Fresh updates from the financial markets indicate that India should focus on taxing capital income such as corporate earnings, dividends and realised capital upside rather than imposing taxes on wealth or inheritance, economist Daniel Waldenström stated, arguing that such an approach would allow the country to address inequality without creating excessive hurdles to investment and savings.

Waldenström, Professor at the Research Institute of Industrial Economics, stated on Saturday that capital should be taxed just as labour is taxed, but cautioned against levies on the underlying value of wealth.

“I think it's important that we tax capital, of course, as we additionally tax labour. The problem is that taxing capital is difficult. I think we should focus on capital income taxation,” Waldenström told ANI.

Explaining his preferred approach, he stated taxes should apply when firms generate earnings or when owners earn income from their investments.

“So when firms make earnings, we should tax that. That's the corporate tax, or when owners take out money from their firms, dividends, or realised capital upside, we should not tax the values as such,” he stated.

Waldenström argued that wealth and inheritance taxes had proved difficult to operate effectively in several countries.

“So inheritance and wealth are poorly functioning capital taxes. We have used them, as many countries have, and they have abolished them and hollowed them out,” he stated.

“Instead, tax capital income, earnings, revenues or interests; that is the way forward alongside of taxing labour and consumption,” he further noted.

His comments came while discussing wealth inequality in India and how policy could broaden participation in economic expansion.

Waldenström stated rising wealth among successful business owners was not in itself the central problem, provided more people were able to participate in the upside generated by productive firms.

“The problem is not that we get a few rich business owners that are successful, but the problem is how to get more people to get included in that, how to lift the bottom,” he stated.

He advocated wider access to education, household savings and investment through financial markets and mutual funds, along with a stronger funded pension system.

Waldenström additionally cautioned that taxes should not become so high that they discourage saving and investment.

“Taxes cannot be too high, we cannot have too high hurdles into saving into the equity market,” he stated.

India’s current income-tax framework already taxes income from dividends and capital upside, with separate provisions applying to different categories of capital upside.

Waldenström stated India’s broader economic outlook remained promising, adding that pro-expansion policies were important for job creation, household incomes and government revenues needed to finance infrastructure and human capital.