Why govts avoid taxing the rich to reduce inequality

THE world around us is in turmoil and there is blood on the streets. From Nepal to France, through Indonesia and Argentina, governments are being booted out of power and popular leaders are facing protests from disillusioned supporters. The key reason is the growing inability of the average citizen to make ends meet and their governments' failure to solve their economic problems.

Almost everywhere, people are losing jobs. Those who are employed work long hours for low pay. Sometimes, like in the US, they work multiple jobs to make ends meet.

Even successful profit-making companies are sacking people in anticipation of what AI might do to their industry. Often, these are well-paid middle-class employees, who are suddenly faced with financial uncertainty.

Many governments tried to spend their way out of the crisis — by giving bailouts to corporates and subsidies to people.

Now, their national debt has ballooned and they are trying to find ways to reduce it. In Europe, Latin America and South-East Asia, governments chose to cut back on spending. They are now paying the price for it.

In France, Prime Minister Bayrou had to resign after lawmakers defeated his proposals to reduce government expenditure on welfare. In Argentina, President Milei is facing massive street protests after cutting aid to universities and hospitals.

In Indonesia, President Prabowo's austerity measures have resulted in violent protests. In Nepal, the Oli government's expenditure cuts on social security and welfare programmes caused widespread resentment, especially since the political class, and their 'nepo kids' enjoyed lavish lifestyles.

In the US, Donald Trump has tried to find another path to solving the public debt problem — his infamous Trump tariffs. The key assumption is that tariffs would force exporting nations to reduce their base prices to keep their market share and, at the same time, fill the governments’ coffers.

As it has turned out, this has only caused a sharp increase in prices in the US and huge job losses. No wonder, Trump's net approval ratings have been negative since mid-March.

After his initial attempts to force China to submit to his tariff tantrums failed, Trump has increasingly tried to bully India. Even Trump sympathisers admit that the 50 per cent duty levied on Indian exports, supposedly because we buy Russian oil, makes no sense since the US hasn't raised tariffs on China, which buys more oil from Russia than we do.

Trump's attempt to badger India to open up our market to American agricultural and milk products is nothing but a tactic to score political brownie points among some of his core voters in rural America.

The Modi government, on the other hand, cannot let American maize, soybean, milk and cheese enter for free because of the political price it might have to pay among India's farming community.

So, all Trump has achieved is to push India towards our traditional adversary — China. The bonhomie between Modi, Xi and Putin, captured by cameras and published across the world, was a warning shot fired at the US.

It is reminiscent of India's earlier position in the geopolitical space of a bipolar world as a member of the Non-Aligned Movement (NAM), till the USSR collapsed in 1991. At that time, India played the two powers against each other to extract maximum diplomatic value from them.

This gradually ended as the US emerged as the sole power in the 1990s and established its role as the global Big Brother. Many observers saw India as America's natural ally as a large market-oriented economy with a democratically elected government.

Now, the Trump administration seems to have endangered that relationship by openly attacking India's trade policies. Even though Trump has walked back some of the rhetoric in the past couple of days, things have soured significantly.

Trump clearly has no answer to how to solve the US' debt problem. Nor does any other global leader in power. Experts are advising governments to cut expenditure while the people, burdened by high prices and pay cuts, are demanding the exact opposite.

Of course, the 'just' way to reduce public debt is to raise taxes on the rich. After all, they are the people who have gained from the loans that governments have taken over the years. They hold most of this debt in the form of government bonds, directly or through investments in large funds. The more governments borrow, the more they earn on these assets.

But no government can increase taxes on the rich since they are the fundamental power behind every throne. Any attempt to raise taxes faces serious pushback from powerful sections of the media, which are owned or controlled by big corporates.

Opinion makers who bat for corporates find easy access to newspaper columns and TV studios, which showcase their views opposing tax hikes. Any political leader who fights on the agenda of taxing the rich finds it impossible to raise funds. S/he also ends up having to deal with a hostile media.

India, too, is not immune to such pressures. We have the problem of losing a crucial export market, which sustains millions of jobs, especially in textiles, gems and jewellery and shrimp farming. At the same time, our farmers will be hit if we reduce taxes on American farm goods.

So, we have no option but to play hot and cold with the US and China. We need new markets for our products, which the China bloc might provide. At the same time, we cannot completely alienate the US since our corporates have close business ties with it and our middle class depends heavily on service exports to the US.

India has no option but to ride it out as things unfold across the world. One thing is for sure: given that we are only at the beginning of the AI revolution, geopolitical and economic uncertainties are not going to disappear anytime soon and we are likely to see many more global realignments in the coming months.

Aunindyo Chakravarty is senior economic analyst.