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Inheritance Tax UPSC NOTE

 Unequal society

  • A remark by Chairman of Indian Overseas Congress Sam Pitroda on implementing an inheritance tax as a tool of wealth redistribution has sparked massive debates

  • There is a need to take a view of citizenship where the poor and the rich can participate equally in democratic decision-making

  • However, in an unequal society, a handful of dominant individuals can wield a disproportionate amount of power through control of resources. 

  • This will likely lead to a few wealthy elites dictating the socioeconomic and political decisions aimed to benefit them at the cost of the majority

  • The recent electoral bonds scam bears witness to this. 

  • The citizenship of wealthy elites would then carry more weight than the majority of the country, which is ethically hazardous

Inequality

  • First, inequality harms growth in the medium-to-long run, by hampering firm productivity, reducing labour income, and diverting resources away from rights such as education

  • Second, in unequal countries, the place of birth holds inordinate power in directing lifetime outcomes. 

  • In India, almost a third of the variation in consumption can be explained by the place of residence: the State, and city or village

  • Third, high inequality is also associated with political polarisation and increased conflict.

  • Fourth, inequality is likely to have a negative multiplier effect on the economy — diminished earnings for the poor lead to reduced consumption and savings and increased indebtedness. 

  • This reduces aggregate demand, limits production and investments, and leads to lower growth rates in the future

  • Using labour bureau data, Jean Drèze and Reetika Khera showed that while real wages of agricultural labourers grew by 6.8% between 2004-2014, they declined by 1.3% in the last decade. 

  • Using Periodic Labour Force Survey data, a Bahutva Karnataka report shows that 34% of households earned less than the recommended daily minimum wage of ₹375 in 2022-23

  • Using Reserve Bank of India data, Zico Dasgupta and Srinivas Raghavendra voice concern about the sharp reduction in household savings and increased debt.

  •  In contrast to these, the richest 1% holds 40% of India’s wealth.

  • Some commentators argue that some inequality during growth is inevitable, and the priority instead should be towards reducing poverty

  • However, research by Tianyu Fan and co-authors shows that the gains from India’s growth over the last two decades have been skewed towards high-income urban residents

  • Keeping everything else the same, there is nothing inherently special in the children of the wealthy compared to the children of the poor. 

  • The Constitution mandates equality of status and of opportunity.

  •  As such the government is obliged to take steps to reduce the disparities arising from accidents of birth

Inheritance Tax 

  • A wealth tax is a recurring tax on all physical and financial assets an individual owns. 

  • An inheritance tax differs from a wealth tax in two ways: it is intergenerational and levied once in a lifetime

  • These taxes are meant to be applied to individuals having high wealth above a threshold

  • When implemented well, these taxes reduce the concentration of wealth and encourage shifting investments from non-productive to productive activities

  • Property of the elite being bequeathed to descendants implies that the descendants do no work to acquire it

  • There is no economic reason for it to be a freebie for them. 

  • Some might argue that inheritance tax will disincentivise innovations

  • But this disregards that innovation is needed to be competitive today and suggests that innovation is solely to propagate dynastic control of resources which is at odds with democratic ideals

  • On the contrary, revenue generated from inheritance tax can be used to fund a diversified set of innovations

  • An advanced country like Japan has up to 55% inheritance tax. 

  • A variant of the inheritance tax, called estates duty, was levied in India between 1953-1985 but this was abolished owing to administrative costs. 

  • However, the economist Rishabh Kumar shows that this was effective in reducing the top 1% personal wealth share from 16% to 6% between 1966 and 1985.

  • Another approach is the land value tax (LVT): this taxes the rental value of land, without considering the property built on it

  • This is borne by the landowner and not the tenants

  • Unlike labour, land is a natural resource and is unresponsive to changes in taxes, making the LVT an efficient source of revenue

  • Given the role of land ownership in perpetuating feudal caste relations in rural India and the pervasive politician-builder nexus in urban India, LVT can be a useful redistributive mechanism


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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: Inheritance Tax UPSC NOTE
Inheritance Tax UPSC NOTE
Learnerz IAS | Concept oriented UPSC Classes in Malayalam
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