As an implication of the missing income of the affluent groups, the paper said “the effective tax rate is not progressive with reference to wealth.”
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IVAN-BALVAN

The wealthier a household, the lesser the income reported by it relative to its wealth, a research paper by Member of the Monetary Policy Committee and Director of Delhi School of Economics, Ram Singh has said. This also indicates that effective tax rate for the wealthy is not progressive to their wealth.

“We find the average return on capital in India to be 7.2 per cent. In contrast, the total income reported by the wealthiest 0.1 per cent of families is only about a fifth of the returns from their capital. For the Forbes-listed 100 families, an even higher fraction of capital income goes unreported,” the paper titled ‘Do the Wealthy Underreport Their Income? Using General Election Filings to Study the Income–Wealth Relationship in India’ said. This paper has been published in the latest edition of the Review of Income and Wealth.

Further, it estimated, for the bottom 10 per cent of families, the total reported income amounts to more than 188 per cent of the family wealth. “For the top 100 families in the FL (Forbes List), the total reported income is less than 0.6 per cent of family wealth,” it said while adding that the income–wealth ratios for individuals also exhibit very similar patterns

The research has analysed various datasets. These include a new and publicly available information in election filings by the contestants for the Lok Sabha, the Forbes’ list and income tax data. it estimates various forms of capital income—such as agricultural income, dividend income, long-term capital gain – using the detailed information on asset ownership contained in the filings along with the rate of return for different asset classes. These estimates were used along with the relevant tax rules to compute the quantum of the taxable and total incomes reported to tax authorities.

The paper used the national income accounts for estimating the rate of return on capital and also for estimating the mismatch between the reported and expected incomes. “Using national income accounts, we show that the total income reported by the wealthiest 5 per cent of individuals is at most a third of the returns from their capital. The total income reported by the top one-tenth of the top centile adds up to just about one-fifth of the returns from their capital,” the paper said.

In other words, their total reported income amounts to less than 20 per cent of their capital income; at least 80 per cent of returns from their capital go unreported in the income tax files. “For the families in the FL, more than 90 per cent of returns from their capital do not figure in their reported income,” the paper noted.

As an implication of the missing income of the affluent groups, the paper said “the effective tax rate is not progressive with reference to wealth.” At the top wealth levels, the wealthier an individual is, the smaller their relative tax liability tends to be. This also means that the existing studies on income inequality fail to capture a non-negligible fraction of the top total income levels; thereby, they most likely have underestimated income inequality, it said.

Though the author of the paper admitted that it highlighted only the adverse implications of underreporting the top income levels. “Tax avoidance can have some positive implications, as well. In principle, it can lead to higher investment by the wealthy groups,’ it said.

Published on April 7, 2025