A case against inheritance tax: Time to break the shackles of ultra-social mindset

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Every time the budget is around the corner, few pet debates spark off, and the one around inheritance tax, is among them. The proponents of inheritance tax cite the need towards serving the nation’s larger cause: programs for the poor and redistribution of income towards building a more equitable society. Besides, the government’s need for funds is also put forth as a key reason for imposing the inheritance tax. Another common justification is that since this tax is in vogue in several countries, why not have it in India too.

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But in my opinion, India should not impose an inheritance tax. Yes, there are several key issues that need undivided attention and comprehensive redressal, like socio-economic empowerment and strengthening of government finances. But, we should think out-of-the-box to arrive at better solutions rather than opt for ideas that are legacy-driven and seeped in a colonial hangover, dating half a century back in time. Refreshing new schools of thought now envision a future devoid of direct taxes, or least explore imposing a higher indirect tax or ‘pay for use’ levies, like for instance toll roads.

In fact, there’s a debate doing the rounds in a few countries over withdrawing inheritance tax altogether, citing it to be highly unfair and hence unpopular.

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Helping the poor is the need of the hour but, it doesn’t necessarily beget more money; it needs a better utilisation and channelizing of the money at hand through prudent and scrupulous implementation of various pro-poor programs. The deprived need some skill orientation too; they need to be taught how to fish, rather than put fish on their plates.

Perfunctory proponents of social equality do not take into account that by simply redistributing wealth, you risk creating systemic shocks. This charitable initiative tends to impair the work attitudes of the recipients of free money, and demotivates the productive resources of the economy from which money is taken away. There have been media reports of thousands of wealthy Indian families leaving the country in search of greener pastures, a direct outcome of the tax fatigue rooted in several layers of Indian taxation. This exodus further damages the economy.

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We cannot rule out the possibility that even if wealth was distributed equally among all the people of the world, after a period of supposed equality, the world will come back to square one in terms of social inequality, given the frailties of human nature. In the process, any attempt at equal income distribution is not prudent; it may hurt the socio-economic fabric and even slow down the GDP growth.

The real problem to be addressed is not the rich making money, but rather equal opportunities for the poor and better lives for the downtrodden. And I reckon, we’re more equal in opportunity today, – even if still far away from equilibrium – than merely a decade ago. That’s why scores of new-age businesses have created enormous wealth, sans the legacy of a family business.

As far as I know, the FAANG stocks didn’t have any ancestral income that could be used to boost and build their empires. Visionaries like Jack Ma and Elon Musk are all first-generation entrepreneurs. So is the case of numerous Unicorns and Soonicorns in India.

It is a universal truth that the government is always in need of money. But is more money in the hands of governments the answer, given the common knowledge that the multiplier effect on economic growth is higher with resources in hands of non-government channels. Further, there is no mechanism to ensure that the funds collected from the inheritance tax levy travels from the government into the hands of the poor. Given the poor implementation of most government programs throughout history, there could be spillage of funds en route, or a less appropriate use of the funds, or money going into the hands of less deserving population bypassing those who are really in need.

We clearly need to break the shackles of this ultra-social mindset of a bygone era. Adding another layer of taxation creates an environment for administrative loopholes and systemic corruption. The wealthy that do not leave the country will get pushed into creating Trust structures to safeguard their wealth. The United Kingdom, as a case in point, collects very little in the form of inheritance tax.

The inheritance funds and properties are essentially the fruits of somebody’s hard work and intellect, and if it is being passed on the next generation in the family, what is wrong in that? In any case, this is the money on which direct, indirect and transaction taxes have already been paid at multiple points, so where is the need for another layer of taxation? More importantly, you need to tax a transaction, not a technicality. Inheritance is not a transaction for profit, but a technicality rooted in a transfer within the family. Rather than adding another tax layer, our debates should be centred around widening the tax base, lowering the tax rates, making more efficient use of existing resources, and better implementation of governmental programs. A classic case in point was the Finance Minister’s highly pragmatic decision to lower corporate taxes. The same pragmatism should be applied in the case of the taxes charged on individuals.

Equal opportunity to all is a constitutional tenet, which must be protected at all costs, but simply taxing one group continuously to favour the other in a perfunctory fashion can never be a sustainable solution. The problem of poverty is real but the run-of-the-mill solution of inheritance tax is not the solution.

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