June 25, 2013
Levying tax on inheritance will check the obsession to accumulate black money for next generations
Unfettered inheritance leads to polarisation of wealth and opportunity. Source: Wikicommons

The subject of tax is seldom an emotional issue as it mostly concerns the manner by which the government generates revenue and encourages or discourages certain sections of trade and industry. History shows that whenever the subject of tax becomes an emotional issue, some fundamental change follows. Today we are in the midst of such a situation. The present discussion on introducing an inheritance tax makes for such a situation. Though it was believed that the Union Budget 2013 will introduce 'Inheritance Tax', nothing really came out of it.

The Indian society is deeply family centric and that accounts for much of its strength, resilience and much of what is desirable in it. As a society the concepts of ‘paap’, ‘punnaya’, ‘dharm’, ‘karm’, the continuity of the soul through its journey of many lives, are well accepted and deeply embedded concepts. Yet we see around us, the wide prevalence and acceptance of corruption and criminalisation of society. Any attempt to resolve this troubling dichotomy leads to a web of interconnected cause-effect solutions that are obviously not appropriate to apply.

Our family-centric existence and value system, in the absence of any social economic and humanitarian safety net becomes our greatest flaw. In the absence of such a safety net, all our values, morality and deeply embedded concepts are sacrificed at the altar of the family. In the absence of such a safety net we completely and absolutely dedicate our lives to the accumulation of wealth for the next generation. The effort is largely wasted and the situation spirals out of control. India follows the policy of unfettered inheritance; no matter what the size of the inherited value it is not taxed. This in a family-centric society soon proves socially disastrous.

We have an inheritance law that allows for vast fortunes to be passed on to the next generation. This for our highly family-centric society works like sweet poison. An individual in our society is programmed for the accumulation of wealth for the next generation, and behaves like a ‘dynastic slave’. ‘Baap ki Jaeydaad’ is dear to us, to a fault and a few make much out of it.

In our country today we see the serious ill effects of unbridled inheritance. It is the root cause of all and every corruption that aims to accumulate wealth, because the corrupt know that the wealth will be passed on to the next generation, who shall hugely benefit from its compounded value and who in turn, shall add to the kitty and compound it ever more.

Surprisingly, the Western thinkers had envisioned such a situation and had largely protected their societies from this malady. They well understood that the free market system that they were propagating could soon degenerate into a corrupt and despotic oligarchy. They understood that unfettered inheritance will lead to polarisation or concentration of wealth and opportunity in a few hands and will hinder competition and enterprise. So they rationalised their inheritance policy. A rationalised inheritance policy in simple terms is as follows:

No tax on inheritance of a value of say $1 million, beyond which the tax is 40 per cent.

The rationalisation has at its core the central principle of capitalist societies: the principle that social privileges should be earned, should be a reward for contribution to society, rather than handed out by government leaders or passed down by aristocratic dynasties. In 1935, Franklin Roosevelt took up the crusade, striking out at great fortunes, again for moral as well as economic reasons. “The transmission from generation to generation of vast fortunes by will, inheritance or gift,'' declared F.D.R., “is not consistent with the ideals and sentiments of the American people...Inherited economic power is as inconsistent with the ideals of this generation as inherited political power was inconsistent with the ideals of the generation which established our Government.''

Countries that have not rationalised their inheritance policy all suffer from similar situations. India, Pakistan, Brazil have wealth and opportunity polarisation at pathological levels, they all suffer from rampant and socially accepted corruption and poor governance.

Recently, Brazil stepped up efforts for collection of the inheritance tax. Egypt, an ancient civilisation, a society that had withstood the vagaries of modernity and the dialectics of many conflicts, scrapped their inheritance policy in 1996. Soon, polarisation of wealth and opportunity and a very high level of corruption made the society ungovernable with results that were seen by all and blamed on a kind of ‘spring uprising’.

Pakistan is one unfortunate country where the serious ill effects of unbridled inheritance in a feudal society have become very clear. The polarisation of wealth and opportunity is extreme and is tearing up the social fabric of society. The recent example of the Swat Valley brings forward what is in store for those societies that do not stop this polarisation. The Swat valley in Pakistan was taken over. The fact is the entire Valley was previously controlled by just four dozen landlords. The landlords and the elected leaders were mostly the same people, protected by a de-motivated and underpaid police force.

In India the extent of polarisation of wealth and opportunity can be gauged by the fact that 1, 20,000 individuals (0.01 per cent of the population) own more than 33 per cent of the nation’s wealth. Is it then surprising that 182 districts across 20 states have witnessed Naxal activity? All big ticket corruption has a singular driving force: To amass wealth to leave for the next generation. With the total absence of any social safety net the perpetrator of such misadventures find ready followers in the society. By this simple logic the evil is perpetuated. The polarisation spares no one, even the reasonably well off have to run hard and fast to remain in the same place. The polarisation of wealth and opportunity and the resultant mindset it generates in society leads only to civil chaos. This evil soon breaks the many unseen bonds so critical to the existence of the social fabric that the resultant anarchy cannot be held back.

It is not essential that all the super rich will oppose the introduction of inheritance tax, because many among them realise that it is good to be rich and powerful but it is better to be rich and powerful in a stable society. The Gates-Buffet initiative, where in the super rich have pledged 90 per cent of their personal wealth to charities after their deaths, is a case in point. Such business leaders realise that inheritance, like patents and trademark rights, is just another benefit that civilised society gives to individuals. At no time should this benefit be used to ransom the very society that grants it. The introduction of an inheritance tax, rationalised to the Preamble and the Directive Principals of State Policy of our Constitution, will be a big step in nation building, inclusive growth and a giant leap in our ability to govern this great country.

There is a very strong correlation between good governance and the presence of a rationalised inheritance policy. Societies that practice unfettered inheritance are generally poorly governed, the only exceptions to the rule worth quoting are Canada and Australia where there is no inheritance tax and yet good governance prevails. Russia and China also have no inheritance tax but the cultural situations are not comparable to India. Corruption and polarisation of wealth and opportunity have reached their extremes in our country. How long will it take us to react?