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The political dissension that has arisen due to comments on inheritance tax is known to all, at least by now, but this isn’t any new. Chairman of the Indian Overseas Congress, Sam Pitroda, commented on this matter, taking an example of this rule in the US.
Let’s look into it from a rational perspective. If other countries have implemented it, then it means there is something about this concept that we should know.
The talk on inheritance tax…
What does the inheritance tax mean?
You are working hard to make that wealth of 10 billion rupees or 20 million rupees, for instance, and when you pass away, only 45% of it goes to heirs and 55% will be taken over by the government.
This is outrageous from the perspective of the man who earned that 10 billion rupees to give it to the government without any questions asked.
Well, there are two types of taxes that come into play: When the beneficiary inherits the property from the deceased, the tax is calculated on the total value of the asset after any exemptions and deductions, that need to be paid by the beneficiary, which is called the inheritance tax. Also, on the date of death of the deceased, the tax charged on the total value of the property is called the estate tax, which the property owner would pay.
India had an inheritance tax, which was called estate tax, in 1953 but it was abolished in 1985. The former finance minister, VP Singh, said it failed to reduce the inequality in wealth issue, nor did it solve the societal inequilibrium issue.
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How is it working for the other nations?
Other nations, such as the United States, Netherlands, Spain, Belgium, and the United Kingdom, have inheritance tax laws in place. The chairman took the U.S. as an example. Let’s see what’s in the US.
The US scenario
There isn’t any federal inheritance in the US, but few of the states in the US impose it. As of 2024, states such as Kentucky, Pennsylvania, Lowa, Maryland, New Jersey, and Nebraska are those 6 states that impose an inheritance tax on inheriting money from the deceased.
When we say the US doesn’t have a federal inheritance tax, it does have a federal estate tax. A tax is applicable on the deceased’s estate if the asset is over $13.6 million and the tax may range from 18% to 40%.
Here’s a look at who follows it:
| Estate | Inheritance | Both |
|---|
Other states don’t have any of these taxes.
The why?
The introduction of inheritance came into play with these thoughts:
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- There’s been a huge gap between the wealthy and everyone else. That’s extreme inequality.
- Riches spent on extravagant things aren’t contributing to society
- Everyone’s voices aren’t heard equally in democracy – The influence of riches is overpowering
- The concentration of wealth within dynasties of the rich—without any taxation or restriction
- Limited opportunities for those who aren’t born with wealth—climbing the social and economic ladder has been hard.
How has it all started?
It was introduced after the First World War in most countries, including the UK, the US, Germany, and France. In the late 1940s, it helped them reduce the inequalities in the countries.
The countries that have been imposing these taxes today are at levels such as 55% in Japan, 50% in South Korea, 45% in France, 40% in the UK, 34% in Spain, 33% in Ireland, and 30% in Germany and Belgium.
In the US, the top 10% of people were slashed by inheritance taxes; the net national income share rose from 33% in 1980 to 47% in 2020.
What has it solved?
- Solves to equalize the inter-generational wealth appropriately
- With these earnings, inheritances are taxed similarly
- It reduces the vertical inequity in taxation
- It encourages the heirs to work and save
- It’ll encourage wealthholders to donate
These were the opinions of the people back then.
John Stuart Mill, an economist and English philosopher in the 19th century, said, “One’s absolute right over property ended with one’s death.” In 1893, Max West wrote in the Political Science Quarterly, “What you inherit is not what you “earned.” It was “unearned,” over which you have no perpetual right.”
The India Scenario
In the 1940s, India had a high level of inequality, especially with respect to asset and land ownership, which was addressed by the introduction of the estate, wealth, and gift tax, respectively, in 1953, 1957, and 1958.
In the 1980s and 1990s, it was withdrawn as its contribution to tax revenue was hardly 0.25% and its administration and compliance costs were high. In the 1990s, despite improved economic growth, the wealth held by the bottom 40% and 50% was reduced while that of the top 10% and 1% increased.
The Perspectives
The views on this are from two sides. One: Why should I give the government what I earn? This is from the rich. Second: We need equality in society.
While the politicians are hitting on two different angles, it becomes both sentimental and logical for the residents to think about this matter, and the debate would just go on. Even if it is imposed, it should be sought after by proper enforcement of laws.
In the past, people have been successful in avoiding it.
- By giving it to the trust, which would then belong to the ownership of the trust.
- Giving it away as a gift seven years before their death.
- Borrowing against the home, thus reducing the asset value.
- Leveraging tax benefits for certain types of property, such as business or agricultural property.
This isn’t a new matter in discussion, as this issue has been raised even before in India. Well, at the same time, it can’t be used as a political opportunity to make a stance, as this is subjective.
