'Wealth is getting accumulated in a narrow section': Economist Ajit Ranade backs wealth tax

Economist Ajit Ranade has renewed the case for a wealth tax, arguing that rising concentration of wealth across generations is creating barriers to economic mobility and, beyond a point, posing risks to growth and stability.

"Wealth is getting accumulated across multiple generations and it is getting entrenched in a narrow section of society," he said in an interview with Outlook Business. According to him, this pattern is not producing sufficient mobility. "The wealth accumulation is not leading to any social churning. The rags-to-riches stories are exceptions; such cases are very few."

Ranade said the broader effect is a concentration of economic power. "By and large, wealth keeps getting accumulated across generations, leading to a concentration of money power with barriers to entry into the wealth circle."

He warned that worsening inequality, if left unchecked, can begin to hurt the economy itself. "This increasing concentration of wealth, reflected in worsening wealth inequality, beyond a certain point is harmful for the economy," he said. "When inequality, whether of wealth or income, becomes too high, it leads to social instability, investor nervousness, capital flight, and eventually growth stagnation."

At the same time, the economist said inequality is not inherently negative. "For sure, some inequality is inevitable and may even be welcome," he said, pointing to sectors such as IT and startups where incomes often rise faster than the average. "That widening gap is what we call inequality."

The concern, he said, is where society chooses to draw the line. "But there comes a point where this inequality becomes excessive. How much is too much has no precise answer in economic textbooks; it is a societal choice," Ranade said, citing arguments by Thomas Piketty and others that inequality is becoming unhealthy across countries.

On policy responses, the noted economist said the first step should be rationalising income taxation. "One response is to aim for a fair and efficient taxation of income, ideally bringing all incomes, whether from agriculture or dividends, under one framework."

Wealth taxation, he said, should be considered as an additional measure, while acknowledging its challenges. "Another additional option is wealth taxation. This is hard because people may find clever means of hiding their wealth in land, gold, benami properties or stash abroad."

To make the idea workable, Ranade proposed narrowing its scope. "One way is to focus only on financial wealth, which is already reported and well-documented," he said, listing stocks, mutual funds, bonds, bank deposits, private equity and sovereign gold bonds. "Using market values or an average over six or twelve months, a modest tax could be designed."

He addressed criticism that such a tax would be easily avoided. "There is strong opposition to this idea, with claims that it is unworkable," Ranade said, noting concerns that wealth could be routed through tax-exempt trusts. "But my suggestion was precisely to make it workable by excluding real estate and other forms of wealth, and focusing only on financial assets to begin with, and to examine the taxability of trusts which hold immense wealth."