How Do the Rich People Avoid Paying Taxes?

Source- ThePressEnterprise

You might have heard Warren Buffet, one of the richest people in the world, pointing out how he, as the owner of a billion-dollar shareholding company, gets to pay a lower tax rate than his secretary. Now you might be wondering why there’s this difference. Well, in America there are different taxes for different income sources. Since Buffet earns income from capital gains, he is likely to pay only 20% of his entire income, while his secretary who earns income through her salary, has to pay 37% of her entire salary earned during the year!

A similar concept also persists in India. People earning from different sources pay different tax rates, and it only seems logical. But what if those tax rates were used unfairly to reduce the taxes to be paid by the riches? According to the Indian tax-paying structure, between the rich and the poor, the rich are supported to pay fewer taxes, while the poor end up paying more taxes.

The Growing Inequalities

The rich are getting richer, and the poor are getting poorer. This statement can be well reflected by the World Inequality Report’22, which shows how the top 10% of Indians earn 96 times more income on an average than the bottom 50 per cent. The way rich people earn money is very different from the sources of money available to any non-rich person, and the way these people are taxed contrast with taxes paid by the rich.

India has one of the worst wealth inequalities compared to any other country, and this gap seems to be increasing every year. The World Inequality Report also highlights how the top 10% and top 1% hold 57% and 22% of the total income, while the bottom 50% share has reduced to 13% in 2021.

How the Rich are Favoured

‘Make us pay more taxes.’ In the recent World economic forum (WEF), a group of more than 100 millionaires and billionaires were seen asking the WEF to let the rich pay more taxes than they already do. They said that the rich were barely contributing their share of wealth to the global economic recovery from the pandemic. So how is it that the taxes, which were initially designed to reduce the wealth inequality by taxing the rich, are the very cause of it? 

This overwhelming gap between the rich and poor is because of the different ways of tax collection from people. The majority of Indians fall below the minimum tax threshold, while a small proportion is able to conceal their incomes to avoid paying the taxes. Currently, only around 1.7% of Indians are paying income taxes. However, within this group, there persist significant inequalities. As mentioned above, the workers and salaried people, whose taxes are paid out of wage income, pay much fewer taxes than the top rich.

The tax laws in India provide various facilities that favour the rich like offering easy loans, deductions, loan write-offs and carrying forward their losses in businesses, just to name a few. As a rich, whether you make profits or losses, you’ll always be at some advantage. Using these benefits, the rich get a loophole to pay fewer taxes on their income.

The philanthropic way to escape the taxes

Ever wondered how the rich get that kind of generosity to give huge donations to charitable institutes? Well, some might do it to see a better world, but for some, it is just another way of escaping the taxes. A lot of elite philanthropy is about elite causes, rather than helping the needy.

Most western countries offer generous tax incentives to encourage charitable giving. India is also one of them. Currently, a person earning up to Rs.10 Lakh a year is supposed to pay 15% of the income as income tax. Those earning more than Rs. 10 Lakh and Rs. 12 Lakh pay 20% and 25% respectively. And those earning above Rs. 15 Lakh are supposed to pay 30% of their annual income.

Gifts in the form of cash and cheques to registered charities are tax-deductible. Now, some donations offer 100% tax reduction while some offer less. The rich use this opportunity to their use, and by donating to charities, they get an escape from paying the high-level taxes charged on their income.

Conclusion

Ever since the pandemic, India’s economy has been hit hard, especially during the second wave in 2021. During the pandemic, two countries- Argentina and Colombia, introduced the wealth tax to fund anti-Covid measures in their country. According to the report by Oxfam, if India also introduces the wealth tax by taxing the super-rich only 1% of their wealth, India could fund its entire vaccination program of Rs.50,000 crores.

It is no secret that India has a large number of riches, whose income could be taxed to provide revenues for various important public spending. It is just a question of when the government will recognize and take proper steps to achieve wealth equality.

Written by Paridhi Aggarwal