Explainer: Benefits of inheritance tax in an unequal society

PM Modi’s speech against redistribution gave an incorrect interpretation of inheritance tax and also reduced the possibility of either political front implementing it.
Prof R Ramakumar
Prof R Ramakumar
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With a single utterance about inheritance tax by Congress's overseas leader Sam Pitroda, the whole debate raging in the country over redistribution of wealth took a turn for the worse. In yet another interview recently, Prime Minister Narendra Modi dismissed any plans of implementing the inheritance tax if the Bharatiya Janata Party (BJP) came back to power. In election mode, the Prime Minister has been repeatedly attacking the Congress, the BJP's main rival, over their manifesto, claiming that they would take away the hard-earned money of the people and give it away to ‘infiltrators’ and ‘those who have more children’, in a thinly veiled reference to Muslims. While thousands of complaints went to the Election Commission for the allegedly communal speech, Modi has been repeating his dialogue fervently, forcing the Congress to reassure the public that there is no mention of redistribution in their manifesto. 

What the dialogue did was give an incorrect interpretation of inheritance and wealth tax and reduce the possibility of either political front implementing it. In a talk with TNM, R Ramakumar, economist and professor at the Tata Institute of Social Sciences, explains what the tax means and how it would benefit the country.

Inheritance tax

Inheritance tax is essentially a one-time tax that those who inherit the wealth of a person (usually, upon the person's demise) pay. Ramakumar stresses repeatedly that it is charged only on a small stratum (0.1 or 1% is the prevailing practice) at the top of the society. “Nowhere in the world is inheritance or wealth tax charged on everyone in the population. Essentially, it is charged on high-value inheritances, while the low-value inheritances are exempted. In the Indian context, the average wealth holding in the top 1% of the country is close to Rs 4-5 crore. So if the inheritance tax is charged for inheritances of Rs 10 crore or more, not even the top 1% of the society is touched. It is a complete canard, saying that the mangalsutra and hard-earned money of the poor or middle-class will be snatched away,” Ramakumar says.

That has been one of the comments Narendra Modi made in his alleged hate speeches, that the mangalsutra – worn by married Hindu women – will be taken away in the redistribution efforts of the Congress. 

Statements by Modi and other BJP leaders, including the incumbent Finance Minister Nirmala Sitharaman, have sabotaged a reasonable discussion on inheritance tax, a concept that has worked well in several countries, Ram rues. “Across the world, the reason for introducing inheritance tax is to redistribute wealth in the society. In Western society, 40-60% of wealth is inherited from parents. The absence of an inheritance tax would deny a very important opportunity for equality to all. In India, we are used to enjoying what is unearned by us, that is why the idea becomes so shocking.”

Listing out the advantages of inheritance tax, Ramakumar says that it will help redistribute wealth in a society where economic inequality levels are high. He quotes French economist Thomas Piketty’s work, which cites the example of France, one of the first countries to adopt inheritance tax, in reducing inequality levels enormously. “Piketty compares France, which introduced an inheritance tax of 40%, with Germany, which charged 15 to 20%. The level of inequality in Germany remained higher than in France for a long time. In India, particularly today, when the inequality levels are soaring, and the top 1% (of the richest) and their share in the national wealth is increasing significantly, we need a measure like this.” Ram goes on to name several countries which have used inheritance tax to their benefit – Japan (55%), South Korea (50%), France (45%), UK (40%), Spain (34%), Ireland (33%), Belgium (30%), Germany (30%) and Chile (25%). 

Thomas Piketty
Thomas PikettyFronteiras do Pensamento / Wiki Commons

Inheritance tax in India

India has used different types of taxes since 1951, including inheritance tax, wealth tax and gift tax. But this was a time when India was a poor country, with hardly any land reforms in rural areas to speak of and the industries in urban areas were largely set in the public sector. The growth in the period between the 1950s and the 80s was not adequate to generate the kind of inequality that the country experienced after the liberalisation in the early 1990s. The inheritance tax did not fetch a significant share to the government, and that is often cited as a reason for its abolishment, Ramakumar says. But then the administrative costs for collecting it were high. There was also pressure from the rich to do away with these taxes. 

But since the 90s, the situation has changed drastically and the inequality levels have grown high. A recent study (by Nitin Kumar Bharti, Lucas Chancel, Thomas Piketty, and Anmol Somanchi) said that the income share of the bottom 50% of the population, which was 23% in the early 1980s, has now dropped to 15%. The middle-class income, which contributed to 46% of the national income in the 80s, has now dropped to 28%. In the same period, the income share of the top 0.1% of the society grew from 30% to 57% (if you consider the top 1% of the population, the growth is from 6% to 23%).

“The foundational reason behind much of inequality in India is ownership of land, buildings, specific assets and savings. This is the right time to think about a tax to tap it as a tax revenue source. Studies have shown that this can fetch you significant amounts of income today,” Ramakumar says and goes on to cite a study by Prabhat Patnaik and Jayati Ghosh, which shows how the five basic rights of employment, food, pension for the elderly, education and health that a developing country should focus on could be achieved with the implementation of such taxes. The expenses to ensure the five basic rights, will be compensated by the implementation of the taxes, even if it is only applied to the top 1% of the richest, the study says.

It is unpardonable that the discussion around inheritance and wealth taxes has been killed for narrow political needs. Even the economists cannot discuss it without being worried about the kind of spin that the policymakers may give their proposal, Ramakumar says. 

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