Taxes in any form are frowned upon. The reason for this is not very hard to find. Taxes reduce the standard of living for the taxpayer. However, socially they serve a very useful purpose by increasing the quality of life for everyone in society. This concept is best illustrated by the road-tax paid by car owners. Tax-paying owners have less money to spend on cars, but the money they forego helps build better roads to commute for all road users.
Ever since taxes were conceived, the quest has been to find the ideal tax. Could there be a tax without a taxpayer? Thomas Paine, the 18th century English-American philosopher, seems to have found the answer when he conceived of Inheritance tax. He reasoned that tax paid from the estate of the dead had no taxpayer as it was collected during transmission. The inheritor has not yet received it and hence will not feel the pain, and likewise its original owner is no more to feel for it. Conceptually, it looked as if the least offensive of all taxes was found. Collected from the estate of the deceased, it was called the Estate Tax and when collected from the inheritors, it became the inheritance tax. Both together are called the Death tax.
Pic src: Wikimedia commons
Opposition to Death tax came from very different angles. Their opponents hold that property is not owned by an individual, but by their family. Hence the death of an individual does not change the ownership of the estate, which continues with the family. The second reason to oppose Death tax was due to the difficulty in paying it. Estates including large blocks of shares by nature are not liquid assets, whereas the tax is to be paid in cash. The levy of Death tax would force the inheritor to sell the assets, thereby reducing its value or in the case of companies, would result in loss of control for the inheritor.
While there are other reasons for opposing Death tax, they are not specific to Death tax itself but are generic to taxes or to the concept of state welfare schemes. These include, illustratively, government inefficiencies, corruption and leakages, rewarding idleness and diluting meritocracy.
Despite this opposition Death tax is levied in almost all democracies. Market rationale supporting it is based on promoting meritocracy and efficiency in society. This reasoning supports promoting economic inequality within a lifetime as it provides an incentive for greater effort and initiative in the society. At the same time it discourages inheritance as it dilutes efforts and initiative of the inheritors by presenting them with a silver spoon. On the economic front too, Death tax is seen to promote a healthy economy as recent macro-economic research studies show more equal societies have longer duration of economic growth with shorter recession cycles.
As with most human endeavours, intellectual reasoning only supports what the human mind believes, which to a large extent is determined by emotions. Looking around in India today, we see a few stark facts. Despite the Planning Commission fixing the poverty line in India at Rs.29 and Rs.22 per capita consumption for a day in urban areas and rural areas respectively, 29% of Indian population is below this abysmally inhuman poverty line. India is also home to the largest number of poor people and children suffering from malnutrition.
On the other hand, in India, 55 dollar billionaires and 200,000 dollar millionaires reside, with these numbers expected to double in the next few years. This rich India is visible through opulence and extravagance on an unimaginable scale that hurts the sensitivity of the thinking individual. To paint the garish picture, a Pune politician hits the headlines for wearing a 3.5 kg gold attire costing Rs.1.25 crores and a Mumbai businessman lives in a billion-dollar plus residence. This is only the tip of the iceberg with much more hidden. India is also the fastest growing market for ultra-luxury products like million dollar Lamborghini cars and multi-million dollar villas in gated communities.
Indian economic growth is sliding down and the focus is on the widening budgetary fiscal deficit. At 5.3% of GDP, it has caught the attention of policy makers. Two paths to bridge this deficit exist. One, cut expenditure and the other, increase revenue. Given the social and economic inequality in the country, coupled with the lack of basic facilities such as primary health and quality education, is reducing public expenditure a viable or feasible option? If it cannot be cut, what is the alternative?
For the government, taxes are the primary source of revenue. Within taxes, the direct tax is seen as less draconian as it harms the poor the least. Given the magnitude of social and economic inequality, can the Indian policy makers choose between raising the income tax rates for higher income brackets and introducing new taxes like the inheritance tax? Or do they need to do both?
As can be expected, there are already voices audible against inheritance tax introduction. Both the logic of family ownership and illiquidity of estates are used. But we need to remind ourselves that our tax system recognizes only individuals and not the family as a unit, except for the Hindu Undivided Family recognized as a taxable entity. Likewise, we can dismiss the logic of illiquidity too, as taxes are not intended to promote the convenience of the tax payer. Moreover, our Constitution also commends it.
The Directive Principle 38 (2) of the Indian Constitution reads, 'The State shall in particular, strive to minimize the inequality in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations'. Given this line of thought in our constitution, do you think our founding fathers would have wanted the inheritance tax removed in 1985?
Even if one concedes the logic that there was inadequate wealth formation in 1985 justifying its removal, this does not seem to hold true in 2013, when India is a land of dollar billionaires and millionaires; where Lamborghinis and Ferraris are parked in multi-million dollar villas.
Turning to the specific, do you think we should have the inheritance tax reintroduced now? I for one will vote for it and strongly recommend that you, too, seriously consider it. For this will go a long way in making our Indian society humane, just and equitable.