Can inheritance tax bring equality? - An Unbiased view

May 14, 2024
Devinder Dhingra

Satyam (The Truth)

A controversy triggered recently when a political leader made a comment regarding bringing inheritance tax to improve wealth equality in India. Before we debate whether such a tax should be imposed or not, we need to first go through the source.

The input is based on a paper titled “Income-and-Wealth-Inequality-in-India-1922-2023: The Rise of the Billionaire Raj” in which it is stated that the top 1% of the adult population in India has a share of 40.1% of wealth.

Now, let us go into the details. 1% of the adult population means about 92.23 Lac adult individuals, who have an average wealth of about 5.4 Crore INR as per the report. If we multiply the two, we get a wealth of about 500 Lac crore rupees that these 1% individuals have.

If an inheritance tax is brought and let us say the tax rate is 25% (mind it, in the US there are just a few states that have inheritance tax and the maximum rate is 18%), the tax amount becomes 125 Lac crore rupees. If this tax is distributed to 99% of the rest of the adult population (of about 91 crore), the amount per adult should be hardly 1.37 Lac rupees.

Who would say that giving 1.37 Lac rupees would resolve the wealth inequality problem? Even if we leave the top 20% of the adult population considering that they have substantial wealth, the amount shall be just about 1.75 Lac rupees per adult.

Moreover, the inheritance tax is a one-time affair in a man’s lifetime and all the top 1% wealthy people will not pass their inheritance at the same time on the same day as they shall die at different times. So, the amount that we have arrived at shall further be down and practically in some thousand rupees.

Then, there shall be a money cap before such an inheritance tax triggers and thus cannot be imposed on all individuals, especially since in India we do not have basic facilities guaranteed if we do not have our own sources.

In a nutshell, the whole idea of imposing an inheritance tax to bring so-called wealth equality seems flawed, especially when historically India had tried this thing from 1953 to 1985 and failed. The reason could obviously be what we have learnt above.

Now, instead of wealth, if we see income distribution, the income of top 1% in India has a share of 22.6%, i.e., a total of about 49 Lac crore per annum, and that is the area, to me, should be targeted to alter the ratios, though absolute equality can never be achieved given the competition, capability levels, governing system and many more factors that occur in real life.

Shivam (The Solution)

As deduced, inheritance tax can never be a solution to improve the equality-ratios. Moreover, rich individuals can create their wealth out of India as well and even the “Income-and-Wealth-Inequality-in-India-1922-2023” paper did not propose it.

Instead, improving income levels all across should be the real goal because ultimately it is the income that produces wealth and occurs on a year basis.

The following are some suggestions to improve the figures:

1. Promote competition. More players in the market, more the money distribution.
2. Make policies, regulations and restrictions to kill monopoly in all businesses.
3. Restriction on the number of businesses that someone can hold or alternatively ask for some minimum CSR commitment in percentage of income if they want to control such things.
4. As actually proposed in the source paper “Income-and-Wealth-Inequality-in-India-1922-2023”, impose an additional tax on super rich individuals on their incomes.

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