Taxing top 1% isn't enough to solve income inequality; how governments spend matters | Opinion

The practice of levying taxes is by no means a purely ‘modern’ phenomenon. (Image used only for representational purposes)(ChatGPT)AI Quick ReadTaxation, in some form or another, operates in all modern economies and constitutes an important source of revenue for the government. In liberal democracies, the institution of taxation must necessarily adhere to the same principles of fairness and equality on which the very state is founded. The question of whether it is possible and desirable to raise taxation on the top 1% is deeply embedded in notions of fairness and wealth redistribution. However, fairness is subjective, or at least culturally specific. While there is a broad agreement among both the political left and right that taxes should be ‘fair’, there is considerably less agreement over what this ‘fairness’ entails as taxation policies vary greatly across time and space.

In this essay, I trace how taxation systems have evolved to reach the forms they take today in liberal democracies, and the idea of fairness they espouse. Thereafter, through examples of existing taxation policies from different countries, I present arguments that are generally deployed, both for and against raising taxes on the top 1% to demonstrate the economic behaviours such policies might engender. In the final section of my essay, I articulate my position on the issue using specific aspects of the Indian economy to expand the conversation from whether or not we should raise taxes on the top 1% to what comes after and how governments are utilising tax revenue.

The practice of levying taxes is by no means a purely ‘modern’ phenomenon. Scholars have contended that as civilisations were established, some form of taxes were levied on subjects, with evidence supporting this idea dating back as far as 3500 BC (Salanié 2003, p. 2). Ancient civilisations in Egypt, Sumer, Mesopotamia, Athens, and Rome all collected taxes in kind. Subsequently, with the fall of the Roman Empire and the rise of feudalism, monetary taxes were imposed on top of earlier forms of taxation, collected primarily from the peasantry through their labour or in kind. Important moments in history shaped taxation policies, most notably the French Revolution, which paved the way for modern taxes to offset the cost of the Napoleonic wars (Salanié 2003, p. 2). Although the history presented above is Europe-centric, complex voluntary and compulsory forms of taxation also existed in early India, China and other Asian countries, evolving similarly during war and peace times.

It was not until 1909 that the concept of progressive taxes was introduced in England when a ‘surtax’ came to be levied on high incomes. The twentieth century saw tax revenue rise for two primary reasons: the world wars, which led to high military expenditure, and the formation of modern welfare states, which solidified ideas around equitable distribution of wealth.

The word ‘taxation’ can be used to mean both the ‘imposition of compulsory levies on individuals or entities by the government’ and the larger fiscal policies of governments (Salanié 2003, p.1). A tax system is expected to ensure certain definitive economic ends to sustain, such as, ‘it should secure a sufficient level of revenue for the government; play a role in stabilisation policy; make efficient use of resources; and be easily administrable…express a common citizenship and mutual regard for one another…to help unify the nation. And, of course…[for] it to be fair, equitable, and just’ (Green 1993, p. 87). In practice, however, it is rare to find a taxation policy that scores highly on all these criteria, but intrinsic fairness appears to be fundamental in most.

A key feature of an equitable taxation structure adopted by most countries has been the use of marginal tax rates (MTR), where higher incomes are taxed at higher rates. A common misnomer regarding MTR is that if an individual earns more, then their entire income is taxed at a higher rate; in actuality, only the portion of income that falls in the higher bracket is taxed at a higher rate. Nordic and Western European countries currently levy the highest MTR on citizens’ income, along with Japan. In the former nations, research shows that the slippery slope framework—coercive and legitimate government power, along with citizens’ deep-seated trust in the system—can account for tax compliance despite high MTR (Gangl et al. 2020). It is also not by coincidence that social welfare measures are most robust in these same countries.

In 1974, Arthur Laffer demonstrated the intricate relationship between tax rates and the revenue governments can generate. The Laffer Curve (Fig. 1) shows that either end of the spectrum, very high or very low tax rates, leads to less revenue generation for the state. Even for the top 1%, tax hikes on top earners are not effective redistribution mechanisms in the presence of tax avoidance (Uribe-Terán 2021) and can ultimately be counterproductive to the goal of increasing revenue.

Income inequality has risen sharply over the past few decades. By ‘2022–23, the top 1 per cent income and wealth shares (23.3 per cent and 40.1 percent) were at their highest historical levels with India’s top 1 percent income share among the highest in the world’ (Bharti et al 2026). The flip side of India’s ‘economic boom’ is that the top 1% controls 40% of the country’s wealth presently, up from 12.5% in 1980. The statistics are even more disconcerting when one further breaks down the top 1% to find that ‘the top 0.1% holds 30%, the top 0.01% owns 22%, and finally the top 0.001% alone controls a whopping 17%’, where one of the strongest solutions offered to ensure equitable wealth distribution is the levying of a ‘comprehensive wealth tax’ on the ultra-rich (Bharti et al 2024).

However, this is where my primary argument lies. Is it simply enough to raise rates of income and wealth taxes on the top 1% to ensure a more equal and fair society? Presently, India is estimated to have a moderately high tax rate, with a significant proportion of revenue already generated from the country’s top earners. Although 20% of the country’s GDP comes from central and state taxes combined, that does not translate into better education, health benefits, or housing standards for low- and middle-income households. Of its GDP, India spends only 4.1% on education and barely 2% on public health, two fundamental pillars of the welfare state and the practical means through which governments can secure better economic futures and equitable wealth distribution among its citizens.

The question then becomes: what comes after? In my opinion, raising taxes on the top 1% is both possible and desirable, to the extent that it can mitigate non-compliance and guarantee a revenue increase, speaking from the Indian context. However, this would be only the first of many steps required to ensure fairness and bridge the wealth gap. India has to not only contend with income inequality, but its deeply entrenched social inequality in the form of caste further exacerbates and compounds the crisis. Hence, to truly commit to fairness and justice, society needs political will and concrete on-the-ground steps by the government to build public trust in its welfarist intentions.

In this essay, I have presented an analysis of the intrinsic role of fairness in the formulation of taxation policies and how they have evolved. I argue this by focusing primarily on income and wealth taxes to highlight both the advantages and pitfalls of raising taxes on the top 1% and the extent to which such a policy may be beneficial. Providing the Indian context, I have argued that solely increasing tax rates on the top 1% cannot fix income inequality—which requires us to look beyond taxation and ask how governments spend their tax revenue. To conclude, both self-interest and efficiency can inform attitudes towards ‘tax policy, as well as fairness’ (Scheve and Stasavage 2016, p. 4) even when rates are high, provided there is public trust in the state machinery.

Disclaimer: The views expressed are those of author. No Mint journalist was involved in the creation of this content.

Bharti, N. K., L. Chancel, T. Piketty, A. Somanchi. 2026. ‘Income and Wealth Inequality in India, 1922–2023: The Rise of the Billionaire Raj’, The World Bank Economic Review, 2026, lhag013. https://doi.org/10.1093/wber/lhag013

Bharti, N. K., L. Chancel, T. Piketty, A. Somanchi. 2024. ‘Towards Tax Justice and Wealth Redistribution in India Proposals Based on Latest Inequality Estimates’, Economic & Political Weekly 59 (21), 91–96

Gangl, K., E. Hofmann, B. Hartl, & M. Berkics. 2020. ‘The impact of powerful authorities and trustful taxpayers: evidence for the extended slippery slope framework from Austria, Finland, and Hungary’. Policy Studies 41(1), 98–111. https://doi.org/10.1080/01442872.2019.1577375