Budget 2020: Nobel laureates Abhijit Banerjee and Esther Duflo bat for wealth tax

Both Esther Duflo and Abhijit Banerjee are steadfast in advocating for "pragmatic welfare schemes" even as the world has made significant progress in poverty alleviation. What are the lessons for India from their "experimental work" on eradicating poverty? And with growth set to slow down to an 11-year low, what can we do to get back on track?

Speaking about wealth tax, Duflo said, “This is really a story like an elephant where if you look at the poorest people in the world, their income has gone up quite a bit during the last 3 decades; so that is the back of the elephant. However, if you are looking at the richest people in the world, their income has gone up even more. So it is the trunk of the elephant. So, these two worlds exist. The problem is that anybody in between has been squeezed in.”

“What we need to do in the future is to preserve the gains for the poorest, make sure that it continues because they are still extremely poor, and at the same time see how this huge increase in top income inequality can be curbed. In the book we do come up definitely in favour of wealth taxation, in favour of estate taxation if it was politically feasible; it seems to be less politically palatable. So we could start on wealth taxation, start on higher taxation of top income and then find ways to distribute this money affectively over a longer distribution such that the very poor continue to do better and the squeezed middle also finds a way to find a productive place in the society,” she added.

Banerjee said that wealth tax is a very logical tax for India to impose. “Just the value of for example the real estate that many people own is so incredibly high, there has been such an incredible windfall from India’s growth and this essentially stays untaxed. Especially because the tax bracket is narrow, we should think of what are other ways to bring people in the tax umbrella and putting the value of their house as their wealth will already get a bunch of people in. If you look at the value of a house in Delhi, Mumbai or Bengaluru, these are astronomical amounts of money. So, I think that that is a very natural way to go especially because the tax base is thin,” he added.

Banerjee believes that the tax base needs to be expanded. “We always found that in the Budget we always let some people off and that is a silly thing to do because after all the economy is growing and we hope that there are more and more people exactly there and so why wouldn’t we take advantage of that,” he said.

On the personal income tax spurring demand, Banerjee said, “If you want to really stimulate demand, I would have thought to spend on infrastructure which will create more jobs. The big fact about Indian growth has been that infrastructure is the great linkage between the growth of incomes in the top deciles and the growth of incomes in the bottom deciles; that comes from jobs and building houses, building roads, bridges, and that kind of thing actually creates lots of income for people who really will spend the money because it is not that they are sitting on a bunch of cash. I am less convinced that an income tax cut would do that. I would definitely go with more spending approach than a tax approach.”

58-year old Abhijit Banerjee is an alumnus of the University of Kolkata, Jawaharlal Nehru University (JNU) and Harvard. 46-yeard old Esther Duflo is the youngest recipient of the Nobel Prize for Economics and they both are currently professors at the Massachusetts Institute of Technology.