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On the question of the inheritance tax

Originally published: Peoples Democracy on May 5, 2024 (more by Peoples Democracy)  |

NARENDRA Modi’s pronouncements on the inheritance tax show a degree of frivolity that is quite amazing and hardly expected of a prime minister. The Congress Party’s Sam Pitroda had mentioned the possibility of an inheritance tax, to which Modi’s response was not a reasoned argument (and there are a few he could have mentioned) but a set of deliberate and banal misinterpretations that make the proposal appear ridiculous; what should have been a serious debate became just maliciously farcical. His two comments were: the women in the audience would have had their mangalsutras snatched away if there is an inheritance tax; and the Congress does not leave you alone even after your death. The first of these is plain wrong, since only wealth over a certain threshold level would attract inheritance tax; and the second, designed to invite audience scorn, is no argument at all: there is nothing wrong with a tax on what is inherited by the progeny after a person’s death.

Let us begin by looking at the very rationale for a big fiscal effort at the current juncture. The neoliberal years, it is generally agreed, have seen a sharp widening of income and wealth inequalities; in India it has even caused an increase in the extent of absolute deprivation. Such deprivation has been particularly sharp during NDA rule; the fact that rural real wages have remained stagnant since 2014-15 is by now well-established. One can even argue that if a proper price index is used as the deflator, then real wages would have actually shown a decline (see the Economic Notes in People’s Democracy April 22-28), which indicates a significant reduction in workers’ bargaining strength. Such a reduction can occur only with an increase in the extent of unemployment that shows up as greater underemployment in the labour force. The combination of declining real wages and increased underemployment makes the current period’s extent of absolute deprivation entirely unprecedented during the last half-century.

Now, if the spontaneous working of a neoliberal economy produces such a result, then it becomes essential that this spontaneous working is modified through fiscal intervention, through imposing taxes on the affluent in order to make transfers to, or provide services for, the impoverished. Avoiding fiscal intervention of this sort in a situation of intensified deprivation therefore amounts to nothing less than a betrayal of the working people. Levying greater taxes on the affluent becomes the duty of the government and such taxes have to be direct taxes, since indirect taxes fall largely on the poor themselves.

Such direct taxes can be on flows such as income or expenditure or on stocks such as wealth or inheritance. In India we do not have any direct taxation of stocks; all our direct taxes are on flows. Now, if additional tax revenue is to be raised and taxation of stocks is to be eschewed, then taxation of flows will have to be increased even further. This however is inadvisable for several reasons: first, if a certain amount of resources is to be raised through additional taxation of flows, then it is likely to affect many more people than if the same resources are raised through the taxation of stock variables; second, wealth taxation has no effect on investment and hence employment (for it affects none of the variables influencing investment, such as the expected growth of the market, or the rate of post-tax profits, or the interest rate), while taxation of profits may lower the investment undertaken by smaller capitalists; third, since wealth inequalities have increased dramatically in recent years, this increase has to be addressed anyway through appropriate wealth and inheritance taxation.

In fact the case for introducing inheritance taxation is even more powerful in ethical terms than the introduction of wealth taxation for the following reason. All writers who wish to defend capitalism do so on the argument that capitalists have some special quality that others in society do not have, some quality that sets them apart; and it is the possession of this quality that both explains and justifies their earning a special category of income called profits. This is a view that is the diametrical opposite of the Marxist view which locates the source of profits in the exploitation of the workers. What exactly this special quality consists in, however, is a matter on which there is no general agreement among the defenders of capitalism: while Schumpeter talked of the “ability to innovate”, others have talked of the ability to take risks, and so on.

Let us for argument’s sake accept this view of capitalism. The fact that a person has such a special quality which entitles him to the possession of wealth, and the income that this wealth earns in the form of profits, does not however mean that his children too possess this special quality; they have to independently demonstrate, starting from a level playing field, that they too have such a special quality, before they can claim any entitlement to the possession of wealth.

For instance, if I was to be entitled to the possession of wealth because my grandfather had some special quality, even though I have in no way demonstrated possessing any such quality, then that goes against the philosophy of capitalism that ownership of capital is a reward for some special quality. Possession of property through inheritance in short is against the self-avowed philosophy of capitalism itself. It actually constitutes a disproof of the proposition that ownership of property and hence the earning of an income called profit is attributable to some special quality of the owners.

For buttressing this legitimisation of the system, capitalists, notwithstanding their utter dislike of inheritance taxation, have put up with it in many metropolitan economies. Japan for instance has inheritance tax rates that reach as high as 55 per cent. In India we no longer have any inheritance taxation; this is in sync with the fact that we also do not have any wealth taxation worth the name, since inheritance taxation, apart from being important in itself, is also a necessary complement to wealth taxation. In its absence wealth can be divided up with impunity into small parcels among the progeny, even before the death of the patriarch, for escaping wealth taxation.

Inheritance taxation therefore should catch any bequeathing of wealth to progeny or friends, not just after death but even before. It should be a progressive tax that operates only above a certain exemption limit (so that monopoly capitalists and billionaires cannot mobilise public opinion against it by invoking the mangalsutra); and it should, as just mentioned, be applicable not necessarily only after a person’s death but whenever the act of inheritance is effectively executed even during a person’s life-time.

The usual argument against both wealth taxation and inheritance taxation is that they are difficult to implement and hence yield very little by way of revenue. But this fact does not justify their abandonment, as has happened in India; it requires rather a careful scrutiny of procedures and their amendment in a manner that makes such taxation effective. How other countries like Japan manage to implement them can also be studied in this context.

The introduction of inheritance taxation incidentally was part of the agenda of our anti-colonial struggle. The Karachi Congress Resolution of 1931 which had visualised an India where there would be equality before law of all citizens, universal adult franchise, a set of fundamental rights for every citizen, and a secular State that did not promote any particular religion, had also clearly stated that “Death duties on a graduated scale shall be levied on property above a fixed minimum”. While the Karachi Congress Resolution had reflected the ascendancy of the Left in the political life of the country, both within and outside the Congress organisation (the Karachi session was held on March 26, just three days after the execution of Bhagat Singh and his comrades), it had enjoyed general support. The resolution, moved by Jawaharlal Nehru, had been carefully scrutinised and approved by Gandhi; and Vallabhbhai Patel had presided over the Karachi Congress where the resolution was adopted. The prime minister’s jejune diatribe against inheritance taxation thus betrays a woeful lack of knowledge about the agenda of our anti-colonial struggle.

Inheritance taxation, together with wealth taxation, is essential at the present juncture, not just for arresting the burgeoning economic inequality in the country, but also for building a welfare State, whose institution is a necessary step for achieving the economic justice promised in the Karachi Resolution.

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