As wealth inequality grows, is it time for an Indian inheritance tax?

Country had had 20 billionaires at the last count: more than some other major economies

Billionaire Bill Gates, in a 2019 interview, supported bringing back a regulation in the US to require the super-rich to pay a 55 per cent tax when they inherit their family fortune.

Proponents of an inheritance or estate tax say it reduces inequality and creates a meritocratic society by chipping away at the enormous advantages the children of the wealthiest families enjoy by an accident of birth. Many large economies levy such a tax on their richest citizens; India does not.

Large inheritances are taxed at 40 per cent in the US and the UK. Germany is at 50 per cent, Japan at 55 per cent and France at 60 per cent. Even Brazil and South Africa levy some form of inheritance or estate tax, but at lower rates.

India had a similar tax before abolishing it in 1985, citing low collections compared to the cost of getting the money. Wealth inequality has grown since then. Suppose the country had only a hundred people with Rs 100 in wealth between them. The one richest person would have Rs 33 in his wallet. The total wealth of the bottom fifty would be around Rs 6. This ratio between the top 1 per cent and the bottom 50 per cent has got worse in the last quarter century.

Less than 0.2 per cent of American estates pay inheritance taxes. It means that such taxes in India may well affect only the super-rich, rather than the average upper-middle-class inheritance. India had at least 20 billionaires at the last count in January. That is more billionaires than at least half-a-dozen major economies that already have an inheritance tax including Brazil and South Africa; as well as larger developed markets like the UK or Japan.

A recent report by the non-profit Oxfam said that a five per cent wealth tax on billionaires, levied every year instead of at the time of inheritance, could almost entirely cover the cost of putting 150 million Indian children back in school.

Studies show that there may be some positives in terms of motivating billionaire children too. Those with a large inheritance are four times more likely to leave the labour force than those with a smaller one, according to a 1993 study entitled ‘The Carnegie Conjecture: Some Empirical Evidence,’ from authors Douglas Holtz-Eakin, David Joulfaian and Harvey S Rosen.

One of the world’s wealthiest people, Warren Buffet, famously says that rich people should only leave their children "enough to do anything, but not enough to do nothing."

It is not clear if Indian billionaires will feel quite the same.