Do the Wealthy Underreport their Income? Using General Election Filings to Study the Income-Wealth Relationship in India

The income reporting behaviour of different wealth groups is a critical public finance issue that has remained under-researched in the Indian and international contexts. We model and estimate the relationship between wealth and reported income for individuals and families across different wealth groups. We use a new dataset based on affidavits filed by election contestants, the Forbes List of billionaires, and the statistics published by the Indian Tax Department. We show that the wealthier the individual or the family, the lesser is reported income relative to wealth. On average, a 1% increase in family wealth is associated with a decrease of more than 0.5% in the reported income as a ratio of wealth. The total income reported by the bottom 10% of families in the data amounts to more than 188% of their wealth; in contrast, the wealthiest 5% [respectively 0.1%] of families reported incomes that were just 4% [respectively 2%] of their wealth. The total income reported by the wealthiest Forbes list families is less than 0.6% of their wealth. From another perspective, the total income reported by the wealthiest 0.1% of families is only about a fifth of the returns from their capital, and at least 80% of their capital income goes unreported in the income tax returns. For the Forbes-listed 100 families, more than 90% of the capital returns do not figure in their reported incomes! The income-wealth ratios for affluent individuals exhibit very similar patterns. We discuss the processes responsible for the “missing” income of the wealthy groups and show that this “missing” income leads to an underestimation of income inequality. Furthermore, it reduces the tax liability of the wealthiest percentile group to a mere 1% of their wealth. The tax liability of the wealthiest 0.1 centiles and the Forbes-listed families is less than one-tenth of their capital income. Tax paid by these groups relative to their wealth is smaller than the relative tax liability for middle-wealth groups. Finally, we show that ceteris paribus, women report lower incomes than men, and that individuals exposed to greater media and civil society scrutiny report relatively high incomes. Our analysis suggests that recent measures taken by the Indian central government against illicit income and wealth hoarding have delivered the intended results.

AUTHOR

• Ram Singh, Delhi School of Economics, and Delhi School of Public Policy and Governance, University of Delhi, ramsingh@econdse.org

MEDIA CONTACT

• press@wid.world.com

ACKNOWLEDGEMENTS

I am thankful to Amit Bhaduri, Surjit Bhalla, Nitin Bharti, Keshav Choudhary, K.L. Krishna, J.V. Meenakshi, Subhash C Pandey, Thomas Piketty, Ajit Ranade, and Charan Singh for detailed comments and suggestions during the course of this study. I thank Soumyajit Ray for excellent research support, Saveri Sargam, Nandini Kumar and Richa Udayana for useful inputs, and the CDE for institutional support. The research presented here has been facilitated by the ICSSR research grant F.No.02/68/GN/2021-22/ICSSR/RP /MJ.