16 February 2022 11:52:11 IST

‘Nations have become richer but governments poorer’

Trilochan Sastry, Professor, Decision Sciences, IIM Bangalore

As part of IIM Bangalore’s ‘Inequality Conversations’ series, Prof Trilochan Sastry, Faculty, Decision Sciences, IIMB, and Founder-Chairman, Association for Democratic Reforms (ADR), delivered a lecture and said: “While income inequality is high and growing, wealth inequality is even higher and growing. Public wealth is much less than private wealth in nations. The silver lining is policy measures can correct this but it will take long.”

This was the third lecture in the series of lectures hosted by the Centre for Public Policy (CPP) at IIM Bangalore, in the context of the recently published World Inequality Report 2022, which Prof Sastry described as a “fantastic report by some of the world’s best economists.” Prof Sastry said his talk was based mostly on chapters 3 and 4 of the World Inequality Report 2022, from which he shared data about income and wealth inequalities. 

Public and private wealth

Pointing to the basic premise of the report that growing inequality can affect politics and policy and lead to large-scale dissatisfaction, he said: “Today’s global inequalities are close to early 20th century levels of Western imperialism. A group of individuals may be more powerful than some nations. Gender, inter-country and carbon footprint inequalities, are also growing. Nations have become richer but governments poorer. Sale of public assets and corporations and tax benefits have contributed to wealthy individuals and poor governments.”

Citing the example of Singapore, where the government is aggressively investing in businesses to generate wealth and income for itself, he drew attention to the fact that Singapore had taken a different approach to the use of public assets. In response to a question, Prof Sastry said, in his opinion, the cooperative model, like Amul, is a good model to generate income, wealth and prosperity.

He went on to discuss the definitions of wealth and national wealth, explain how wealth arises and distinguish between public and private wealth.

About the relation between national wealth and income, he said: “If wealth increases at the same speed as national income, then the relative importance of wealth in the economy remains unchanged. Growth in wealth simply reflects normal economic growth. Wealth-Income ratios (the value of national wealth divided by national income) disentangle and separate growth of wealth from growth rate of economy.”

Concentration of wealth

On the matter of “financialisation” of economies through big money, Prof Sastry said a major point that the report was making was that such financialisation could lead to instability and crises that could spread very quickly across the world like how the sub-prime crisis of 2008-09 in the US soon affected almost every country.

Discussing wealth inequality, he said that the top 0.001 of the adult world (51,700 persons) own 6.4 per cent of global wealth and the bottom 50 per cent (2.6 billion people) own just 2 per cent of global wealth. “Policy measures in early 20th century led to the decline but opposite policy measures, in the later 20th century, led to the increase in inequality.”

Quoting from the report on emerging economies, he said: “In India, in 1995, top 1 per cent had 22 per cent of wealth and in 2020, they had 32 per cent The drivers are privatisation, snowballing effect of capital accumulation, and de-regulation which led to higher returns on larger wealth.”

Talking about where the wealth is, he said for the poor it is in cash, bank balance, and perhaps land and housing of low value; for the middle class, it is in real estate and perhaps financial assets, and for the super-rich (the top 10 per cent), most of it is financial assets.

Progressive tax

From chapter 7 of the report, he observed that it recommends progressive wealth tax and progressive income tax. “In rich countries today, wealth tax gives 3.5 per cent of national income, in poor countries 0.5 per cent. In the US, until 1980, income tax rates at the highest slab were 80 per cent”

Saying that it could be an eye-opener for those who believe that income tax in India is very high, Prof Sastry pointed out that “In the US, the UK, Germany or Japan, top income tax rates reached 80 per cent (or more) a few decades back. The rates remained much lower for bottom income earners. In the US, between 1936 and 1980, the top income tax rate was consistently 70 per cent or more. But most countries reduced top income tax rates since 1980 under the ideology that if you reduce income tax rates, revenue collection from tax will go up.”

While explaining wealth and property tax, Prof Sastry said, “Wealth tax is hardly there, and property tax is not progressive. The super-rich hold most of their wealth in financial assets. The report argues that these should be taxed and in a progressive way, which can generate substantial revenues for governments to empower billions, fight climate change, create jobs, invest in public infrastructure, invest in health and education and so on.”