Bottomline | Don’t tax the inheritor, nudge her

KV Prasad Jun 13, 2022, 06:35 AM IST (Published)

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When looking at taxes as with anything else, the first economy we look at is the largest in the world for cues. The US has an estate tax that ranges from 18% to 40% with an exemption limit of about $13 million, as per an Ernst & Young report of 2023. This is far higher than several other economies that levy such taxes, with rates ranging from 3% at the lower end in Poland to 55% in Japan.

But how useful have these taxes been?

More pain, little gain

A study by economist Alan Cole found that the US raises very little money as the tax applies to very few households. He adds that the costs of administering the tax make a strong case for repeal and over 13 countries have repealed such taxes. In the case of the US specifically, he argued that a repeal would boost the capital stock, boost GDP, create jobs, and thus increase the federal revenue.

In India too, our earlier tryst with such a tax yielded little. The estate tax in India was abolished in 1985 and the then Finance Minister VP Singh had claimed then that it had failed to achieve its objective of redistributing wealth. Repeating a mistake, with the same objective therefore flies in the face of logic.

Flawed premise on redistribution

Willy-nilly, the burden of any tax follows on the already compliant. An estate tax would therefore end up only taxing the existing taxpayer more. As wealth that’s hidden will never be revealed or taxed, therefore any such levy would only lead to redistribution of money from a section of the population. And several involved with such policymaking will also escape the net. Interesting to note here is that in the second phase of the Lok Sabha elections, the highest net-worth declared is a little over Rs 600 crore. That just sounds intuitively flawed. The whisper numbers for several politicians are significantly higher.

Any such tax will only give a fillip to the grey or black economy and lead to unproductive use of capital, which if formalized can add to the nation’s economic development.

What’s more, even the sums garnered through any such levy may not significantly benefit the intended beneficiaries. As we all know, much of the spends by the Centre get lost in transmission. So, to expect any transformative benefit from any such levy requires a leap of faith.

Nudge the wealthy to give

A better way to do good can be to push the wealthy to do more for society. Especially given the huge inequality that exists in the country today. This can be done by requiring those being bequeathed wealth beyond a significant threshold to compulsorily contribute a small percentage of it towards a good cause(s). This will ensure the direct transmission of benefits to the needy. Such funds should be transferred to registered or accredited organisations, that in turn are held accountable for delivery. All such organisations should be subjected to external audits funded from the proceeds received from donors and the results must be published for all to see on their websites. Other good governance practices must also be mandated for such organisations.

The good work being done by foundations like the Azim Premji Foundation, funded by private wealth, are a good example of how wealth can be put to effective use sans any estate tax.

It is only fair that an individual inheriting significant wealth be given the right to decide how she or he would like to give back to society, rather than imposing a new toll the outcome of which will not be clearly visible to all. What’s more, unlike corporate CSR, much of which gets expended in “aligned” activities, such donations can go towards causes that often find few takers.

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KV Prasad Journo follow politics, process in Parliament and US Congress. Former Congressional APSA-Fulbright Fellow