A case against inheritance tax: it’s time to break the chains of the ultra-social mentality

Whenever the budget approaches, few debates about pets arise, and the one around inheritance tax is one of them. Proponents of the inheritance tax cite the need to serve the larger cause of the nation: programs for the poor and the redistribution of income toward building a more equitable society. In addition, the need for government funds is also put forward as a key reason for imposing inheritance tax. Another common rationale is that since this tax is in vogue in several countries, why not have it in India as well.

But in my opinion, India should not impose inheritance tax. Yes, there are several key issues that require undivided attention and comprehensive redress, such as socio-economic empowerment and strengthening public finances. But, we should be thinking outside the box to arrive at better solutions rather than opting for legacy ideas steeped in colonial hangovers, dating back half a century in time. Refreshing new schools of thought now envision a future devoid of direct taxes, or at least consider imposing a higher indirect tax or ‘pay as you go’ levies, such as toll roads.

In fact, a debate is going around in a few countries about abolishing inheritance tax altogether, citing it as very unfair and therefore unpopular.

Helping the poor is the need of the hour, but it doesn’t necessarily mean more money; it needs better use and channeling of available money through careful and scrupulous implementation of various pro-poor programs. The poor also need skills orientation; they must be taught to fish rather than put fish on their plate.

Superficial advocates of social equality ignore the fact that by simply redistributing wealth you risk creating systemic shocks. This charitable initiative tends to alter the work attitudes of the recipients of the free money and to demotivate the productive resources of the economy from which the money is taken. The media has reported thousands of wealthy Indian families leaving the country in search of greener pastures, a direct result of tax fatigue rooted in multiple layers of Indian taxation. This exodus further harms the economy.

We cannot exclude the possibility that even if wealth were distributed equally among all the peoples of the world, after a period of supposed equality, the world would return to square one in terms of social inequality, given the fragilities of the human nature. In the process, any attempt at equal income distribution is unwise; this can damage the socio-economic fabric and even slow GDP growth.

The real problem to be solved is not that the rich earn money, but rather equal opportunities for the poor and a better life for the oppressed. And I think we are more equal in terms of opportunity today – even if we are still far from even – than just ten years ago. This is why dozens of new-age businesses have created enormous wealth, without the legacy of a family business.

As far as I know, FAANG stocks had no ancestral income that could be used to boost and build their empires. Visionaries like Jack Ma and Elon Musk are all first generation entrepreneurs. This is the case with many unicorns and soonicorns in India.

It is a universal truth that government always needs 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 the hands of non-governmental channels. Moreover, there is no mechanism to ensure that funds raised from inheritance tax pass from the government into the hands of the poor. Given the poor implementation of most government programs throughout history, there could be a spill of funds along the way, or a less appropriate use of funds, or money in the hands of less deserving populations by bypassing those who really need it.

We clearly need to break the chains of this ultra-social mindset of a bygone era. Adding another layer of taxation creates an environment conducive to administrative loopholes and systemic corruption. The wealthy who do not leave the country will be pressured into creating trust structures to protect their wealth. The United Kingdom, for example, collects very little in the form of inheritance tax.

Inheritance funds and properties are basically the product of someone’s hard work and intellect, and if it is passed on to the next generation in the family, what’s wrong with that- inside ? In any case, this is money on which direct, indirect and transaction taxes have already been paid at several points, so where is the need for another layer of taxation? More importantly, you should tax a transaction, not a technical detail. Inheritance is not a for-profit transaction, but a technicality rooted in a transfer within the family. Rather than adding another tax layer, our discussions should focus on broadening the tax base, lowering tax rates, more efficient use of existing resources and better implementation of government programs. A classic example is the very pragmatic decision of the Minister of Finance to lower corporate tax. The same pragmatism should be applied in the case of personal taxes.

Equal opportunity for all is a constitutional principle, which must be protected at all costs, but the mere act of continually taxing one group to superficially favor the other can never be a lasting solution. The problem of poverty is real, but the banal solution of inheritance tax is not the solution.

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