Estate or Inheritance Tax – A Balanced Perspective
On April 24, Sam Pitroda, Chairman of the Indian Overseas Congress, returned to India on invitation by Indira Gandhi in 1984, and Advisor to Rajiv Gandhi (1987) and invited by Man Mohan Singh in 2004, created controversy over an inheritance tax system, while defending the Congress wealth redistribution promise in its manifesto. He stated, “India should benefit from the wealth of the super-rich. In America, there is an inheritance tax. If one has $100 million worth of wealth and when he dies he can only transfer probably 45 percent to his children, 55 percent is grabbed by the government.”
Sam Pitroda, by his unsolicited advice on the need for estate and inheritance tax in India based on half-baked data spreading fraud news, has given a golden opportunity to Modi and the BJP to indulge in a diatribe at election rallies. No wonder, Jairam Ramesh, Congress Party’s Chief Spokesperson, quickly responded stating “Does not reflect Congress party views” thereby unequivocally distancing the Party from such a policy. Ramesh also said this was a BJP tactic to divert attention from other serious issues. Other members of the party pointed out that such a proposal does not find mention in the manifesto.
However, India did have a contentious inheritance tax law until four decades ago. It was in fact abolished in 1985; a year after Rajiv Gandhi became PM. The Congress leader VP Singh was the finance minister when the law was repealed.
For a balanced insight, there is a need to understand the subtle difference between the Estate Tax and the Inheritance Tax. Estate taxes are levied on the net value of property owned by a deceased person on the date of death. In contrast, inheritance taxes are levied on the recipients of the property. Also, note that Property tax differs in its import from others.
As per economic experts, estate and inheritance taxes are poor economic policy. They fall almost exclusively on the domestic capital stock—accumulated wealth that makes a country richer and more productive as a whole. Taxes levied on the capital stock restrict job growth and harm the economy.
Russia does not have an inheritance tax or other wealth transfer taxes. This applies regardless of the residency status of the individual. However, inheritance law does come into play when expats die without a valid will.
In China, Mao Zedong nationalized land from the 1940s through the 1960s, seizing it from affluent families — who were killed in large numbers — and transferring ownership to the state. So, there is no private “freehold” land ownership in China. All urban land in China is owned by the Chinese government and is commonly referred to as “state-owned land.” All rural and suburban land is owned by rural collectives (i.e., local groups of farmers) and is commonly referred to as “collective land.” Until last year, sales of land leases accounted for 7 percent of the Chinese economy. China has no inheritance tax, but charges a transfer fee (Fangchanguohufeizong) when real estate assets are transferred upon death.
Next, irrefutable Facts of the USA: As per one report, there is no federal inheritance tax in the USA. Of its 50 states and the District of Columbia, only six states — Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania — impose a tax on inherited assets as of 2024. Of the six states with inheritance taxes, Kentucky and New Jersey have the highest top rate of 16 %. Iowa is phasing out its inheritance tax, with full repeal scheduled for 2025, with the tax's top rate at 6% in 2023. All six states exempt spouses, and some fully or partially exempt immediate relatives.
As per yet another data, the U.S. has the fourth highest estate tax rate in the OECD at 40%; the world’s highest rate, 55%, is in Japan, followed by South Korea 50%, and France 45%. Fifteen OECD countries levy no taxes on property passed to lineal heirs. In USA, the estate tax or ‘death tax’ is imposed only by 13 states. Each state has a different threshold. The U.S. under current law has a high top rate and a large exemption. As a result, its estate tax, despite the high rate, raises very little revenue. And, U.S. estate tax receipts have declined precipitously over the last fifteen years, from $38 billion (2015 dollars) in 2001 to an estimated $20 billion in 2015.
Many countries with estate or inheritance taxes have exemptions. Exemptions are a simple way to make taxes more progressive. And, they have high compliance and enforcement costs. Assessing the value of people’s assets is difficult, and it is not a worthwhile pursuit if those assets are not particularly valuable. Exemptions tend to have a substantial impact on revenues.
Yet another significant finding is revenues from the estate tax decline precipitously as the exemption increases, lowering the number of estates required to pay. As exemptions chip away at the tax and narrow its base, the tax becomes less and less worthwhile as a source of revenue.
As estate taxes become narrow-based, meager revenue sources with high administrative costs, repeal becomes a strong option. As per experts, repeal of the U.S. estate tax would gradually increase the U.S. capital stock by 2.2%, boost GDP, create 139,000 jobs, and eventually increase federal revenue.
The estate tax is losing ground around the world, not because moral issues have been resolved, but rather because it fails at the basic characteristics of being a tax. Its rate is high, causing a substantial drag on growth. Its base is narrow, making it a poor revenue raiser. And lastly, its base is poorly-defined, creating additional economic losses from tax planning.
The ultimate purpose of tax collection is revenue generation. As per experts, repealing the estate tax would increase investment, add jobs, and expand the economy. The capital stock (accumulated wealth) makes countries more prosperous and productive as a whole. Even governments that like high revenues for robust social welfare spending find that estate or inheritance taxes are not an effective source. The experiences of these countries have been largely positive. In 2013, IKEA founder Ingvar Kamprad returned to his home country of Sweden after forty years of living abroad for tax reasons.
No wonder, the estate tax in America is, perhaps, the most contentious. On one hand, there is the compelling and deeply ideal of equal opportunity. On the other hand, there is another ideal, no less compelling: that we ought to give our children better than we ourselves received. However, in practice, the association between estate taxes and equality is not strong. And, they are often in conflict with each other, no matter how noble each one seems in isolation.
In India, when there was Estate Duty till 1985, people hid their wealth. Even in the first phase of land reforms in India that lasted from 1950–1972, some farmers in Punjab actually divorced their wives (but continued to live with them) in order to avoid the provisions of the Land Reforms, when the land ceiling under assured irrigation in a year was seven hectares or nearly 18 acres. Corruption flood gate will open.
In retrospect, Sam Pitroda, based on half-baked knowledge with least understanding the inherited cultural heritage, has stirred a major political controversy. After all, many countries have recognized that estate and inheritance taxes are a poor source of revenue and eliminated these taxes altogether. Given low revenue collections, high compliance costs, and a narrow base, even the U.S. is seriously considering following suit. Considering the peculiar inherited cultural issues and repeal of inheritance/estate taxes by many countries, the Congress Party and I.N.D.I alliance can ill afford to venture on promoting and implementing such a contentious proposal?
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