Why urban families earning Rs 1L a month should be considered low income

Those who the govt thinks are rich are actually quite poor, and we need to rethink our notions of rich and poor for tax purposes

A myth has been assiduously fostered by the bhakts in and of the CPM that inflation hurts the poor the most. Most of these bhakts were, and are, champagne-swilling frauds trying to tell the world that their hearts are in the right place. It's, however, where their brains are that's important.

The simple point about inflation, which no left-wing economist will tell you, is that it hurts the consumer, whether he is poor or rich. But all producers gain from it. That includes farmers.

So, I want to suggest to the government that it should redefine notions of rich and poor because unless it does that, it will not know who all are being hurt by inflation. The recast will thus help improve tax policies, which it must do before General Elections 2024. In terms of behavioural economics, there is very little "fairness" in the current way of deciding who is rich and who is poor.

Let me explain why.

For purely political reasons, Indian parties and governments have always pretended that equitable taxation is not for India. The rich, they say, have to pay for the poor. That's why our middle class starts at an income level of around Rs 20,000 a month.

That it is not taxed for being "rich" is not the issue. The issue is what happens after that.

You start paying tax as soon as you get to an income of as paltry a sum as Rs 21,000 a month. Up to about Rs 42,000 a month, it's at 5 per cent. Thank God for small mercies because even Rs 42,000 a month doesn't get you all that much.

The moment you go above Rs 42,000 a month, the government starts taking 20 per cent of whatever is above that threshold. So, if you're earning Rs 83,333.25 a month (Rs 9.99 lakh a year), Rs 9,375 of that goes as tax, which leaves you with about Rs 74,000 a month. That hurts.

Once you go beyond this income of about Rs 84,000 a month, you suddenly become properly rich in the government's eyes. It then takes away 30 per cent. Consumption suffers.

Of course, those who work for the government don't suffer much loss of consumption due to low pay since their pay is fully indexed to inflation. They get a lot of things like housing, medical help and transport at subsidised rates. Yet they think you are rich if you earn a lakh a month.

That's why all governments have thought that at Rs 1 lakh a month, you can be taxed at 30 per cent. They don't care that this actually makes you quite poor if nothing is subsidised for you. Why would they?

I have written this many times before, but it's a point worth reiterating. In urban India, with semi-nuclear families who have large overheads, Rs 1 lakh a month is low income. Even Rs 3 lakhs a month is just about ok if 30 per cent goes by way of income tax.

This is the reason why consumption is not picking up. Those who the government thinks are rich are actually quite poor. So, if the Marxist formulation that inflation hurts the poor more is correct, then we need to rethink our notions of rich and poor for tax purposes.

Here's what the government needs to do. It must have just two rates of tax: 15 per cent for income up to Rs 1 crore a year and 35 per cent beyond that with all exemptions etc., abolished.

The old notions of rich and poor must be replaced by a new consumption-based one. And the tax thresholds must be drastically revised.