A call for an inheritance tax has sparked debates on high inequality’s harm. We argue for progressive taxes to curb this, stressing equal participation in decision-making for all citizens. In unequal societies, a few controlling resources wield excessive power, skewing decisions to benefit elites, as seen in the electoral bonds scandal. This imbalance undermines democratic principles and poses ethical risks.

WHY INEQUALITY MATTERS

• 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
• 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
• High inequality is also associated with political polarisation and increased conflict
• 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

ANALYSIS OF DATA

• Real Wages and Income Disparities:
  • Labour Bureau data analyzed by Jean Drèze and Reetika Khera reveals a stark contrast in the real wages of agricultural laborers. While there was a growth of 6.8% between 2004-2014, there has been a worrying decline of 1.3% in the last decade.
  • The Bahutva Karnataka report, based on Periodic Labour Force Survey data, highlights that a significant 34% of households earned less than the recommended daily minimum wage of ₹375 in 2022-23, showcasing income disparities.
• Household Savings, Debt, and Wealth Distribution:
  • Reserve Bank of India data underscores a troubling trend of sharp reductions in household savings and an increase in debt levels, indicating financial stress among a considerable portion of the population.
  • Additionally, the wealth distribution statistics are concerning, with the richest 1% of the population holding a staggering 40% of India’s wealth, reflecting a significant concentration of resources among a small segment of society.
• Inequality, Growth, and Poverty Alleviation:
  • Some commentators argue that a certain level of inequality during periods of growth is inevitable, with the priority being the reduction of poverty. However, research by Tianyu Fan and co-authors challenges this notion, highlighting that the benefits of India’s growth over the past two decades have disproportionately favored high-income urban residents.
  • It’s important to note that there is nothing inherently superior in the children of the wealthy compared to those from poorer backgrounds. The Constitution’s mandate for equality of status and opportunity places an obligation on the government to address disparities arising from birth circumstances.

THE IDEA OF INHERITANCE TAX

• Difference Between Inheritance Tax and Wealth Tax:
  • An inheritance tax is intergenerational and levied once in a lifetime, targeting high wealth passed down to descendants. In contrast, a wealth tax is recurring and applies to all physical and financial assets owned by an individual above a threshold.
• Purpose and Benefits of Inheritance and Wealth Taxes:
  • These taxes aim to reduce the concentration of wealth among a few individuals and encourage investments in productive activities rather than non-productive assets.
  • Property being inherited without effort by descendants doesn’t align with economic fairness, and taxing inheritances can prevent the perpetuation of dynastic control over resources.
• Effect on Innovation and Economic Growth:
  • Critics may argue that inheritance taxes disincentivize innovation. However, innovation is crucial for competitiveness, and these taxes can fund a diversified set of innovations rather than promoting dynastic control.
  • Countries like Japan with high inheritance taxes demonstrate that such taxes can coexist with innovation and economic growth.
• Historical Context and Effectiveness:
  • India had a variant of inheritance tax called estates duty, which effectively reduced the top 1% personal wealth share from 16% to 6% between 1966 and 1985, showcasing the potential effectiveness of such measures.
• Land Value Tax (LVT) as a Redistribution Mechanism:
  • LVT taxes the rental value of land, providing a more efficient source of revenue compared to taxing labor or capital.
  • In India, where land ownership dynamics contribute to socio-economic inequalities, LVT can serve as a useful redistributive tool.
• Addressing Tax Evasion and Improving Compliance:
  • Critics often cite tax evasion as a challenge. However, investments in improving tax compliance, as shown by recent research, can yield significant revenue and outweigh the costs.
  • Auditing the top income brackets can generate substantial returns, further justifying the implementation of these taxes.
• Economic Impact and Public Expenditure:
  • Economists suggest that implementing a 2% wealth tax and a 33.3% inheritance tax on the top 1% in India can significantly boost public expenditure, leading to socioeconomic rights such as living wages, healthcare, employment, and food security for the poor.