A steeper tax rate on very high incomes may be necessary to address widening inequality while preserving the role of private enterprise, said Kaushik Basu, professor of international studies at Cornell University and former chief economic adviser (CEA) to the government.
Speaking at the UNU-WIDER development conference titled “Green Industrialization and Inclusive Growth in a Fractured World Order”, organised by the Institute for Studies in Industrial Development, Basu said a structure of progressive taxation could impose significantly higher tax rates on marginal income earned by the very wealthy.
He noted such a system would apply only to income above a certain threshold rather than to an individual’s entire earnings, with the additional tax revenue effectively redistributed to poorer sections of society.
“When you become super-rich, you are not trying to earn more in order to buy more cars and more mansions. You are just competing with the other super-rich person and you want to beat that person. If you have a taxation system where you leave the relative rankings unchanged, the competitive spirit remains exactly in the same way, but it’s happening at a lower level,” Basu said.
He said such a structure could reduce extreme inequality without weakening incentives for private enterprise because competition among the very wealthy was often driven by relative status rather than consumption needs.
Basu added rising inequality in the digital economy could weaken social cohesion and affect democratic institutions.
“In the olden days when you became super-rich, you would buy more mansions, more cars, more yachts, and more planes. Today, in the age of digital connectivity, social media, and platforms, you buy up a media platform. So inequality is translating into a domain where it did not earlier. And I believe it’s taking away the voice of the ordinary people. It’s having a silencing effect because some people are capturing these spaces of voice,” he said.
Basu also highlighted the role of trust in economic activities, noting that many transactions depended on the expectation that parties would honour commitments. When such trust weakens, it can have wider implications for markets and institutions because expectations that others will not fulfil their obligations can disrupt transactions and reduce cooperation within the economy, he noted.
Echoing similar concerns, Luis Felipe López-Calva, global director for the Prosperity Vertical at the World Bank, said declining public trust in governments reflected deeper institutional weaknesses and called for restoring legitimacy through job creation and universal welfare systems rather than fragmented support programmes.
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