Open Access Research Article
BRIDGING ECONOMIC DISPARITY THROUGH INHERITANCE TAXATION: A COMPARATIVE ANALYSIS.
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Article Details
BRIDGING ECONOMIC DISPARITY THROUGH
INHERITANCE TAXATION: A COMPARATIVE ANALYSIS.
Abstract.
Emerging
economies like India are grappling with intensifying wealth disparities in a
global landscape characterised by escalating economic inequality. This trend is
particularly alarming in India, where a pronounced wealth gap has emerged,
characterised by significant wealth accumulation among the affluent. At the
same time, the impoverished segments of society continue to face enduring
hardships. This article presents the potential of inheritance taxation as a
formidable instrument that governments can deploy to mitigate the concentration
of wealth within a specific sector of society. Inheritance tax, a levy imposed on
the transfer of movable and immovable assets from one generation to the next
upon the owner's death, is a critical mechanism for addressing economic
disparities. This article argues for the reintroduction of estate tax, or
inheritance taxation, as an ideal strategy for the Indian government to combat
the prevailing economic inequalities within its economy. A comparative analysis
of the effectiveness and statistics on total revenue of inheritance taxation in
countries such as the United States of America, the United Kingdom, and France.
This comparison seeks to assess the viability of implementing inheritance
taxation within the Indian context, considering the nation's unique political
and economic environment. The issue of economic disparity in India is not
merely significant; it represents an urgent challenge that necessitates
immediate and thoughtful intervention from policymakers. Through this analysis,
this article provides a comprehensive roadmap for how inheritance taxation
could effectively diminish the wealth gap, thereby contributing to a more
equitable distribution of wealth in India.
Keywords: Income Inequality, Wealth Gap,
Socio-Economic Equality, Intergenerational Transfers, Progressive Taxation.
1. Introduction:
India, like many other countries in
the developing world, is currently faced with the issue of economic disparity.
This means there is a significant divide in the wealth distribution between
different sectors of society. The staggering wealth gap is an important
concern, hindering social development and increasing socio-economic
inequalities. Inheritance taxation is a viable tool that can counteract this
wealth disparity. Additionally, comparing India to other nations where
inheritance taxes have been effectively imposed demonstrates the potential of
inheritance taxes as a weapon to lessen economic differences in that nation.[2]
Inheritance tax has been a
topic of controversy across the globe. While some see it as a way to reduce
inequality by bridging the gap between rich and poor, others argue that it
violates property rights or that the government should not intervene in family
property matters. India used to charge an estate tax from 1953 to 1985 but now
does not charge an inheritance tax. Examining whether reintroducing inheritance
tax would benefit India, considering its social and economic structure and
comparing it to the inheritance tax model used by other countries. The paper
also covers the difference between inheritance tax and estate tax.[3]
2. Economic Disparity in the Indian
Economy:
India's economic growth in recent
decades has been very significant; however, according to the World Bank's
premier half-yearly assessment of the Indian economy, the IDU notes that India's
7.2% growth in FY22–2023 was among the quickest among major countries, even in
the face of severe global problems. India's growth rate was over double that of
emerging market economies and ranked second among G20 nations.[4] With this immense growth that drives
its GDP, many people are becoming wealthy. However, this increase has also
resulted in a disproportionate distribution of wealth. While a substantial
portion of the population struggles to access necessities, a small fraction
enjoys immense wealth and economic gain. Economic inequality is showcased in
forms such as, but not limited to, income inequality and unequal access to
education, healthcare, and basic infrastructure.[5]
With India’s economic growth
and development, wealth is concentrated in the hands of a few privileged
sections of Indian society. This financial imbalance negatively impacts India's
overall progress and economic growth. Additionally, it also promotes social
injustices and inequalities. The concentration of wealth in the hands of a
select few has severe consequences, impacting various aspects of life such as
education, healthcare, and social mobility, thus further widening the gap
between the rich and the poor.
In recent years, this issue
of economic inequality has gained significant traction both on a domestic level
as well as on an international level. Several studies and reports have
confirmed the alarming disparity level in India. According to the Credit Suisse
Global Wealth Databook, the top 1% of the population in India holds 73% of the
total wealth. This report shows the adverse effects of economic growth with no
efficient taxation mechanism to counteract the enormous wealth gain.[6]
The causes for such wealth
disparity are deeply rooted in India and the lack of efficient tax mechanisms.
In India, a significant reason is the caste system. A study from 1996 to 2003
concluded a substantial wealth disparity between the lower and upper cast.[7] Economic inequality is also
multifaceted and complex. Additional factors such as caste-based
discrimination, lack of land reforms, and unequal access to education and
opportunities have contributed to this unequal distribution of wealth.[8]
The disparity between the
affluent and people with low incomes is made worse by the fact that a sizeable
section of the Indian economy is informal and that a high proportion of the
population works in low-paying everyday occupations. Economic disparity has
wide-ranging effects that are harmful to society as a whole.[9] The cycle of poverty is sustained by a
lack of access to essential utilities, healthcare, and decent education, which
hinders people and communities from improving their situation. Furthermore, the
concentration of money in the hands of a small number of people fosters social
inequality, corruption, and political power, widening the divide between
various societal groups.[10]
The Indian government has
implemented policies to reduce economic inequality and promote inclusive
growth, but their effectiveness and long-term impact are being debated. The
root causes of inequality should be addressed to bridge the wealth gap, and
equal opportunities should be ensured. This requires collective efforts, policy
reforms, and a commitment to social justice. Through the implementation of
Inheritance taxation, there will be added revenue for the government for the
more excellent implementation of such policies, thereby contributing to the
reduction of income inequality. Another advantage of this form of taxation is
the added advantage of levelling the playing field, whereby there is adequate
competition within the economy. This ensures that there is efficient
utilisation of resources that is common to all.
2.1 Calculation of economic
inequality
Gini Coefficient:
The Gini coefficient is a
statistical measure used to calculate the income inequality within a country or
a specific population. It measures the distribution of incomes among
individuals, families, or households within a particular economic system.[11] Applying the Gini coefficient extends
beyond measuring income inequality; it can also be used to assess wealth and
consumption disparities. However, it's important to note that while the Gini
index provides a valuable overview, it does not capture the nuances of wealth
distribution across different population segments, such as the top or bottom
deciles.[12]
The variation for the Gini
coefficient is between 1 and 0, wherein if a specific country or an economy
gets a value of 0, there is perfect equality. If a particular country or an
economy receives a value of 1, there is total inequality. Therefore, it is
necessary to interpret the Gini coefficient in conjunction with other
socio-economic indicators to understand income inequality in India.[13] In India, it is calculated by
policymakers to implement relevant measures to reduce the same. It is
calculated using various sources, including but not limited to income tax
returns, surveys on household income, etc. The National Sample Survey Organisation (NSSO) and other independent are tasked with
calculating the Gini Coefficient. According to the World Bank, India’s Gini
coefficient was estimated to be 0.352 in 2011. This value is of moderate
standing; however, because of the rate of growth of India’s economy, it is said
to have risen. According to the data, India has the third-highest number of
billionaires in the world, with 169. China comes second with 495 billionaires,
while the United States has 735 billionaires.[14] Based on the said data, it is
inevitable that there will be a rise in inequality. Because of the compounding
effect of wealth, this situation will only increase the wealth concentration.
America is said to have a
significant wealth inequality level, and the population's disparity has risen,
irrespective of multiple taxation measures. With its current growth rate, which
does not yet have an inheritance taxation regime, India will have detrimental
effects due to wealth inequality.
3. Inheritance Taxation: A Solution to
Economic Disparity:
3.1. Inheritance tax
With roots in the Roman
Empire, governments typically implement inheritance taxes to redistribute
wealth and prevent it from concentrating in the hands of a small number of individuals.
Although"estate tax" and "inheritance tax" are occasionally
used synonymously, they have specific distinctions. An inheritance tax is based
on the value of each inheritance received from the estate of a deceased person.
In contrast, an estate tax is levied on the total value of all property owned
by a dead person. However, in many countries, inheriting a person's property
and assets requires the legal heirs to pay inheritance tax. This concept of
taxation is prevalent in multiple countries. India is one of the only countries
with its size that does not currently have an inheritance taxation regime.[15]
3.1.2 Meaning
The tax is levied on a
person upon death when they receive any inheritance from their parents or
family members.
3.2 Inheritance Taxation in India
Inheritance tax in India was
enforced from 1953 to 1985 through the Estate Duty Act of 1953. The tax was
part of the donation-based system administered by the Act of 1953, which aimed
to encourage wealth distribution, decrease inequality, and generate revenue for
the government. The tax was levied on the net worth of inherited property, with
the highest tax rate of 85% applied to property valued at more than 20 lakhs
rupees. However, estates with less than one lakh and Hindu undivided property
with less than fifty thousand rupees were exempt from the tax. Inheritance tax
was only payable when property was passed between generations, and gifts made
during one's lifetime were also assumed to pass on death if made within six
months of death for public charity purposes and within two years for other
reasons.[16]
Despite the legislature's
noble intention, India's inheritance tax system has faced several pitfalls. The
Estate Tax in India could not achieve its objective of revenue collection for
the government because, in its short tenure, the administrative costs far
exceed the revenue collected. The society also negatively perceived inheritance
taxation because of its double taxation implications. Individuals of affluent
standing were able to avoid paying inheritance taxes by hiding their assets
through the practice of owning Benami land. A method wherein the property of
one person is registered in the name of another person who has no monetary
investment in the property. Immovable property, one of the most transferred
assets in India post-death, with it now being hidden, rendered the Estate Duty
Act ineffective in earning significant money. Eventually, the government
repealed the Act since it failed to fulfil any of the goals that the
legislature had intended.[17]
4. Policy Implementation in India.
Double taxation is a significant
problem when implementing inheritance taxation in India. This is a common
concern across all nations. This is because an individual who has already paid
their taxes at the inception will again be subject to taxation when their
assets are transferred to their offspring. This is a form of double taxation
because there is tax payment for the same asset or property. Because of these
negative perceptions, there is difficulty in implementing inheritance taxation
policies. However, if there is a change in perception amongst the public
wherein the public is adequately informed about the positive implications of
inheritance taxation, a different outcome may be achieved.
A study conducted by Spencer
Bastani and Daniel Walsenstrom on the effect of public perception of inheritance taxation focuses on
the challenges of aligning public opinion of the focus group with policy
objectives using the impact of inheritance taxation on the reduction of income
inequalities as an example. The study found it challenging to implement
Inheritance taxation because of its negative perceptions and the need to
understand the positive effects of inheritance taxation in the reduction of
wealth and economic inequality. In the study with the use of a registered link
survey, it was found that when the subjects of the study were presented with
the positive implications of Inheritance taxation on the reduction of economic
inequality, there was a change in the perception of the participants wherein
the study found out that there was a 30% increase in support for inheritance
tax observed in the treatment group compared to the control group. The study
found no significant interaction effects with the treatment across various
demographic factors, such as income, wealth, age, marital status, family
circumstances, and educational attainment. The study also highlights the
complexity of public attitudes towards taxation policies, as subjects favouring
low-exemption rates displayed support for high-exemption inheritance taxes. The
study concludes that informed dialogue among the participants can significantly
enhance support for inheritance taxation and demonstrates the critical role of
public perception in shaping the future of taxation policies.[18]
4.2 Progressive Taxation.
This is to ensure equitable
change with the implementation of taxation policies because, according to the
Credit Suisse Global Wealth Databook, India's top 1% of the population holds
73% of the total wealth. A taxation policy that taxes the top 1% of India's
population will substantially ensure the intended effect is achieved.[19]
5. Is It An Effective Mechanism?
What are the
effects of the implementation of inheritance taxation? Does it achieve the
intended results? In addition to the increase in revenue for the government, it
also aids in the reduction of inequality and redistribution of wealth in
society.
Burkhard Heerdeals examines
the interlinked relationship between the intergenerational transfer of wealth,
inheritance taxation, and wealth distribution in a study conducted to find the
optimal taxation rate for reducing inequality. The study uses the Gini Coefficient
as a metric for measuring wealth inequality in specific economies, and in the
instant case, it focuses primarily on the United States of America. It shows
how intergenerational transfer of wealth can increase the wealth concentration
in a select group of individuals or families. The effect of inheritance
taxation on life-cycle economies is measured. The study results highlight the
potential of an optimal tax rate to promote wealth equality and stimulate
economic growth. The optimal inheritance taxation rate required to combat
wealth inequality is around 95%, demonstrating the extent of the wealth
concentration problem and the possibility that inheritance taxation could help
solve it.[20]
The study concludes by
stating that the Gini coefficient of wealth distribution increases from 45.7%
to 48.5%. Therefore, wealth inequality also increases. The model also
determines that inherited wealth is not the only source of wealth inequality.[21]
Although inherited wealth is
not the only reason for inequality in society, taking appropriate measures to
curb inequality at its inception is of dire importance. In addition to reducing
inequality, this form of taxation also ensures that the heirs will have to
contribute to the country's development.
6. Inheritance Taxation in Foreign
Jurisdiction.
6.1. United Kingdom:
Inheritance tax has long been imposed in
the United Kingdom. The inheritance tax in the United Kingdom is governed by
the Inheritance Tax Act of 1984. Estates that surpass a particular threshold
are liable to tariffs under the Inheritance Tax Act of 1984. The money made is
used to fund welfare programs, infrastructure improvements, and public
services. Despite some criticisms, the UK's inheritance tax system has been
critical in redistributing wealth and minimising economic inequality. The
total revenue from inheritance tax in the UK is 7 billion pounds, around 0.3 of
its GDP.[22]
6.2
France:
The French General Tax Code governs the
imposition of inheritance tax in France. The money raised from this kind of
taxation goes a long way toward supporting social programs, education, and
public services. France’s experience shows that inheritance taxation is a
valuable instrument for lowering population wealth concentration. In the
year 2022, the inheritance tax percentage on total GDP was 0.7%, and the
inheritance tax percentage on total tax collected by the government amounted to
1.5%[23]
6.3. United States:
Inheritance taxes in the United States are
governed by state laws, not at the federal level. However, a federal estate tax
is legislated under the United States Code (26 USC §2056). Only six states
impose an inheritance tax, including Iowa, Kentucky, Maryland, Nebraska, New
Jersey, and Pennsylvania. The revenue from estate and gift taxes at the federal
level was about 33 billion U.S. dollars in 2022. The forecast predicts a
decrease in this revenue in 2023 to 27 billion U.S. dollars, with an expected
increase to 57 billion U.S. dollars by 2033.[24]
Conclusion:
The imposition of inheritance taxation
presents a compelling avenue for addressing the entrenched issues of economic
disparity and wealth concentration in India. Examining India's financial
landscape reveals a stark inequality that undermines the broader social fabric
and restricts inclusive growth. While India's historical engagement with
inheritance taxation through the Estate Duty Act of 1953 to 1985 showcased
initial attempts at wealth redistribution, the absence of such a regime today
raises critical considerations for its reimplementation against rising economic
inequality.
The comparative analysis with countries
like the UK, France, and the United States, each with its approach to
inheritance and estate taxes, elucidates the potential of such taxation
mechanisms to significantly reduce wealth gaps while supporting public welfare
and infrastructure development through increased government revenue. However,
the effectiveness of inheritance taxation hinges on careful policy design,
public perception, and the implementation of progressive taxation systems that
address concerns around double taxation and ensure that the tax burden is
equitably distributed, particularly among the wealthiest segments of the
population. As such, fostering informed public discourse, understanding the
nuanced impacts of such taxes on economic behaviours, and learning from
international experiences can guide India towards a more equitable economic
future.
[2] India: Extreme Inequality in
Numbers, Oxfam International, available at
https://www.oxfam.org/en/india-extreme-inequality-numbers (accessed Apr. 14,
2024).
[3] Nikhil Kamath, A Case for
Inheritance Tax, Forbes India (Dec. 30, 2021), available at https://www.forbesindia.com/article/new-year-special-2022/a-case-for-inheritance-tax-by-nikhil-kamath/72915/1
(accessed Apr. 1, 2024).
[4]World Bank, Indian Economy Continues
to Show Resilience Amid Global Uncertainties (Apr. 4, 2023), available at
https://www.worldbank.org/en/news/press-release/2023/04/04/indian-economy-continues-to-show-resilience-amid-global-uncertainties
(accessed Apr. 3, 2024).
[5] International Monetary Fund, India:
Staff Country Report No. 2022/001 (2022), available at
https://www.imf.org/-/media/Files/Publications/CR/2022/English/1INDEA2022001.ashx
(accessed Apr. 4, 2024).
[6] Credit Suisse, Global Wealth
Databook 2021, available at
https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-databook-2021.pdf
(accessed Apr. 1, 2024).
[7] Zacharias, Ajit; Vakulabharanam,
Vamsi (2009): Caste and wealth inequality in India, Working Paper, No. 566,
Levy Economics Institute of Bard College, Annandale-on-Hudson, NY
[8] Pathania, G.J., Jadhav, S., Thorat,
A., Mosse, D. and Jain, S., 2023. Caste Identities and Structures of Threats. CASTE:
A Global Journal on Social Exclusion, 4(1), pp.3-23.
[9] Oxfam International, India: Extreme
Inequality in Numbers, available at
https://www.oxfam.org/en/india-extreme-inequality-numbers (accessed Apr. 1,
2024).
[10] The India Forum, Trends in Economic
Inequality in India, available at
https://www.theindiaforum.in/economy/trends-economic-inequality-india (accessed
Apr. 1, 2024).
[11] Intelligent Economist, Gini
Coefficient, available at https://www.intelligenteconomist.com/gini-coefficient/
(accessed Apr. 5, 2024).
[13] Joe Hasell (2023) - “Measuring inequality: What is the
Gini coefficient?” Published online at
OurWorldInData.org. Retrieved from:
'https://ourworldindata.org/what-is-the-gini-coefficient'
[15] Enrichest, Evolution of Inheritance
Tax: A Historical Overview, available at https://enrichest.com/en/blog/evolution-of-inheritance-tax-historical-overview
(accessed Apr. 5, 2024).
[18] Spencer Bastani and Daniel Walsenstrom: Perception of Inherited Wealth and
the Support for Inheritance Taxation Economia, Volume 88, Issue 350, Pages
532-569, April 2021.
[19] Credit Suisse, Global Wealth
Databook 2022, available at https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-databook-2022.pdf
(accessed Apr. 4, 2024).
[20] Burkhard Heerdeals: Intergenerational Transfers, Taxes
and the Distribution of Wealth The Scandinavian Journal of Economics, Vol. 103,
No. 3, pp. 445- 465 Sep. 2001.
[22] UK Parliament, House of Commons
Library, "Inheritance Tax : a basic guide," available at
https://commonslibrary.parliament.uk/research-briefings/sn00573/ (accessed Apr.
1, 2024).
[23] Organisation for Economic
Co-operation and Development, Revenue Statistics, available at
https://stats.oecd.org/index.aspx?DataSetCode=REV (accessed Apr.1, 2024).
[24] Organisation for Economic
Co-operation and Development, Revenue Statistics, available at https://stats.oecd.org/index.aspx?DataSetCode=REV
(accessed Apr. 1, 2024).
Article Information
BRIDGING ECONOMIC DISPARITY THROUGH INHERITANCE TAXATION: A COMPARATIVE ANALYSIS.
Authors: NEVIL PEREIRA
- Journal IJLRA
- ISSN 2582-6433
- Published 2024/04/18
- Issue 7
About Journal
International Journal for Legal Research and Analysis
- Abbreviation IJLRA
- ISSN 2582-6433
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