India needs to lift the poor, not take down the rich: Daniel Waldenström

Swedish economist Daniel Waldenström argues that education, broader asset ownership and growth-led redistribution are key to tackling inequality

Swedish economist Daniel Waldenström, an expert on income and wealth distribution and taxation, is a professor at the Research Institute of Industrial Economics. In an in-person interview with Asit Ranjan Mishra on the sidelines of the 5th Kautilya Economic Conclave, Waldenström argues that the rich are part of the solution rather than the problem. Edited excerpts:

 

Is India’s biggest inequality problem one of wealth or access to opportunities in health and education?

The bigger challenge is inequality of opportunity, especially in the education system. It is a key driver of long-term growth: getting more youngsters into school and giving them the same opportunities. This is morally right but also economically efficient.

 

India has a growing number of billionaires alongside hundreds of millions of low-income people. Does the rise in billionaire wealth tell us whether India is becoming more unequal?

 

It tells you that people are doing productive things and creating value. Business owners make up the dominant group among billionaires, and when a business competes successfully, even globally, it grows, and its owners may become rich. I think that is inherently positive. They hire people, produce services, and generate tax revenue. There will be gaps, but I do not think these gaps are the key challenge. The solution is not to take down business owners but to lift people, help more people become productive entrepreneurs, and help more working people invest in the stock market and mutual funds.

 

Which is economically least damaging: a wealth tax, an inheritance tax or capital income taxation?

 

Definitely capital income taxation. You tax companies on their profits through corporate tax, or tax owners when they take out dividends or realise capital gains. At that point, they have the money to pay. Half of all capital taxes in Organisation for Economic Co-operation and Development (OECD) countries come from corporate tax. Wealth taxes have been abolished by almost all countries because they are too complex, the value of the assets being taxed is difficult to determine, and taxpayers often lack the cash to pay. The same goes for inheritance tax. These are symbolic taxes that should be avoided. Equality of opportunity comes through the education system, not through taxing profitable entrepreneurs.

 

Critics say the richest people, such as Elon Musk, hold their wealth in unrealised equity rather than income. Should unrealised capital gains be taxed? 

That is perhaps the worst way to tax capital. It is a paper construct, a guess, and it is anti-entrepreneurial. Startups can have huge prospects but no profits; taxing their paper gains would destroy them. Treating unrealised gains as income is a theoretical concept that tax authorities have never used. Musk runs companies that create value, and that value sits in the firms, not in his personal accounts. It could just as well be a consultancy in Mumbai. Those gains are reinvested in hiring and factories, which drives growth. When the firm makes profits, we tax them. We should not portray growth and investment as something suspect.

 

Property tax is also levied on unrealised value, yet people accept it. Is that not comparable?

 

That’s a good point. Property tax is really a tax on imputed rent, calculated as a fixed share of the property’s value, say 1 per cent, rather than a tax on the annual gain. It is related, and that is why property taxes are problematic. They are almost everywhere the most hated tax. We do not know the true value, and owners have no cash income from the property. Taxing property when it is sold is better. You can also lower the rate or link it to services such as street repairs and garbage collection, which can make taxpayers more willing to pay. The common theme is that taxing assets is always problematic. If countries want to tax family firms, they are better off relying on corporate tax and the taxes paid by employees than on inheritance tax.

 

Where do you agree and disagree with French economist Thomas Piketty on inequality?

 

He is an old colleague and a friend. We agree that an inclusive approach to the economy matters and that income differences matter to the economy and to people. That is why I have spent 20 years studying the subject and building databases with him. We disagree on the role of growth. I think it creates resilience and solutions, even for the environment. Light-emitting diode lighting is an example: a private-sector innovation that gives us light using a fraction of the energy. For India, that would be key, and it requires entrepreneurs. When they become wealthy, that is a signal that they have done something right. They took risks; most do not succeed, but some lead the way. So, for me, the rich are not the problem; they are part of the solution.

 

I do not see the rich as the key problem, even for democracy. Sweden has almost the highest number of billionaires per capita and is a stable democracy with high trust in government, thanks to its constitutional features and media pluralism. Much of the research on taxes and inequality has been dominated by researchers who view the rich as a problem. New research is emerging, such as The Everywhere Millionaire by Owen Zidar and Eric Zwick, which shows that market economies have created a broad base of middle-class owners.

 

So Piketty focuses on redistribution, while you focus on growth?

 

I want to talk about pro-growth redistribution: not taking down the rich but lifting the poor. In OECD countries, the most important equalising factor is welfare services such as healthcare, schooling, and elder care. These are financed through taxes on private-sector incomes and profits. So growth is a prerequisite for redistribution, though redistribution is also necessary. Some advocates of growth talk too little about inequality. I want to lower the barriers to entering the labour market, broaden ownership among working people, and tax constructively.

 

Artificial intelligence (AI) could raise returns to capital relative to labour. Does your longstanding optimism about growth in middle-class wealth survive?

 

I think it could. After 30 years of automation, we have not seen any large shift in the capital share of gross domestic product in any country. Some people want to see such a shift, especially in the US, but OECD data show that the share has not changed for 60 years. It hovers around 25 per cent, depending on the definition. I would be interested to see India’s data.

 

As robots and AI do more, their costs fall, and competition emerges. Big Tech companies may dominate, but OpenAI and Anthropic did not exist 10 years ago, and China and India are producing open-source models. That competition will hurt profits; even Google is facing revenue threats. There will be a transition, with losers and winners and new kinds of jobs. If food and energy become cheaper thanks to AI, real incomes will not suffer. I remain very positive.

 

Does the AI era require a universal basic income (UBI)?

 

Not UBI as such, but we need social insurance and income protection. Restructuring is typically good at the macro level because we gain efficiency, even if some firms go out of business. Social insurance protects individuals, so they do not lose everything if a job disappears and can move to another one. That also builds acceptance of change.

 

UBI would provide income regardless of employment status, which creates strange incentives, may discourage young people from pursuing education, is very costly and strains relations between recipients and workers. In India, too, some jobs become obsolete as the economy develops. Handmade goods, for instance, may be replaced by machine-made products, but people have found other things to do.