Tuesday, 29 May 2018

Tax privilege to India's privileged


Why do people fall for greed, amass lot of power and wealth, engage in corruption? There are many reasons including poverty and opportunity, lack of ethical standards, competition for resources, poor deterrence and misuse of discretionary powers. However, I would like to draw your attention to lesser known and acknowledged reason - willingness to provide the cushion to the future generations. As widely known in India, "sat pidiyo ka sochna padta h ( we have to think for our seven generations while earning and making any substantial decision)". Given our present status of social security, there is always an urge to save for the future generation. This urge results in Dynasty politics, skewed ownership of resources and inequality of opportunity. The Rich becomes richer, poor becomes poorer.
विरासत की कुर्सी पे राज करते हैं ||
फिर भी खुद पे नाज़ करते हैं ||

Today, we shall discuss about inheritance and feasibility of taxation on inheritance. First lets understand, what is inheritance? An inheritance is money or property which you receive from someone who has died. Inherently, it is a birth right, however its morality and sustainability can often be questioned. Allowing privileged families to concentrate property ownership and thus deny the prospect to others is not justified. It creates an unfair hierarchy of the resources which further undermines the legitimacy of the very idea of property. Earth has given to all men and women equal means. So exclusively privileging some of God's children with inherited property and not others seems to be morally wrong.

Image result for inheritance tax imagesThe recent work of Thomas Piketty, Capital in the Twenty First century highlights that the inherited wealth grows faster than overall output and income and furthers the inequality. What might the possible way out then? Depriving of the inheritance rights might create chaos in further distribution of inherited wealth. Taxation seems to be fair way out - specially the progressive one.

Further, tax is the price we pay for civilization and progressive taxation acts as a balancing force. Inheritance tax is a tax that is levied against a particular asset during the time of its inheritance. 

Firstly, I want to be clear that inheritance tax is not at all related to death tax, so it hardly can be criticized in the name of "no taxation without representation".  It is a tax on the recipient of the income , the lucky winner chosen by the lottery of birth.
Neither there is a concern for double taxation. Its similar to the sales tax which is paid out of the income which has already being taxed.

There are number of arguments for inheritance taxes:
  • Firstly, they promote fairness and equality. It is morally legitimate, as the heirs have rarely done anything to deserve the money that comes their way. 
  • Secondly, they are going to definitely fill up the Government coffers and increase the tax base and in turn overall tax revenue.
  • Thirdly, parents would focus on increasing the capability by investing in children's educational and social skills, rather than spoon feeding with the silver spoon. They would hardly prefer a depreciating lump sum package over a self sustainable skill set to their children.
  • The parents who choose to leave a truckload of money for their successors, tempts them to lead an unproductive life with the easygoing money they already have access to. There are numerous examples of such rich brats. Studies have revealed that easy access to unearned wealth destroys the incentive to work and to experiment - one of the reasons the wiser among the super-wealthy are generally careful to limit the money they leave to their children and make them financially prudent by themselves
  • It would further reduce the gender divide. Since  in a country like India, inheritance rights are still limited despite having all the laws in place
  • they are progressive in nature, hardly hurting the lower rung of society. Its in the nature of direct taxes, which is supposed to increased for a developing economy
  • This might be a potential stimulant for the economy. If people know that they have to pay taxes with exorbitant rates on their money to be left behind. they’ll be more likely to spend it when they’re  alive.
  •  In fact, inheritance tax is a life saving tax: it promotes social mobility, uniformizes the opportunity, limits the inherited advantage, redistributes wealth
  • It would definitely reduce the greed to earn more and more and save more and more for future generation. The distinction between luxury of oneself and luxury of future generations bridles more corruption
  • Last but not least, more property would have to be sold while inheriting to pay the tax. It might ease the house-price inflation and giving people the chance to buy property by having higher liquidity

Its interesting to note that inheritance tax, which was known in India as ‘estate duty’ and is imposed on the property passed to an heir, was brought in effect in 1953 and abolished by the Rajiv Gandhi government in 1985 as it failed to reduce wealth inequality.


International scenario
Estate duty or inheritance tax is there in most of the developed countries like US, UK, Japan, France etc. and the taxes in these countries are as high as 50-55%. Countries such as the UK and the US already have inheritance tax in place. In fact, the US has three types of taxes on estates/assets being passed on to the next generation, which are, Gift Tax, Estate Tax and Inheritance Tax. 
However, these countries have a structured social security and retirement plan in place. 


Which safeguards to be kept in mind while implementing it?
No policy can be without its potential shortcomings, loopholes and disadvantages. We need to analyze it from Indian angle too.
Rich/HNI always get their own way, its necessary to plug those loopholes. The threshold can be kept higher(more than 10 crores) and reasonable tax rates so as to prevent the burden on the middle class. The implementation can come in phases. There should be robust mechanism which can be used to validate the real asset holdings. Digitisation of property, pan coverage of such records is necessary for that.

Those countries who have kept in place this system, have robust social security system. Indian concept of Hindu undivided family is the only existing full proof social security as on date. Indian government should think about this pressure on individual against the future uncertainty. Robust social security system is the demand of time

There is the risk that heirs will be forced to sell homes as soon as inheritance happens. It can be mitigated by allowing them other channels to pay the taxes gradually rather than by immediate sale.

This transition should be smooth and step by step so as to accommodate the upheavals which may result. Target the wealthy by setting a meaningful exemption threshold. Second, close loopholes for those who are caught in the net by setting a flat rate. With the revenue generated by higher inheritance tax, reduce other taxes like surcharges and cesses.

However, since the politics trumps economics mostly. This economic measure has to make its way out after passing through many tests- and a strong will for redistribution of wealth is needed for the same.