Inheritance Tax As A Tool Of Wealth Redistribution

Why in the news?

The use of inheritance tax, a system similar to an existing tax system in the U.S. to address economic inequality is widely debated in India. 

What is Inheritance Tax?

• Inheritance tax is levied on property/asset inherited upon an individual's death. It differs from estate tax, which is levied on the total value of a deceased person's estate.
• It is levied by many countries. E.g.  Japan (tax rate is 55%), South Korea (tax rate is 50%) etc. 

Benefits of Inheritance Tax

• Revenue Generation: It may lead to an increase in revenue generation for the government which can be used for social sector programs to uplift poor people.
• Reducing Wealth Inequality: It can mitigate the concentration of wealth and reduce economic inequality by redistributing a portion of inherited wealth to fund public programs and services. 
• Promoting Meritocracy: Taxing inherited wealth can help create a more level playing field and promote a meritocratic society. This is because, taxing inherited wealth ensures that success is based more on individual effort and talent rather than family wealth and privilege.
• Encouraging Productive Investment: It can encourage wealthy individuals to invest their wealth more productively during their lifetimes, rather than simply passing it on to their heirs. 
• Intergenerational Equity: Inheritance tax can help ensure that resources are more evenly distributed across generations, rather than perpetuating dynastic wealth accumulation.

Implications of Inheritance Tax

• Potential Tax Evasion: Due to the high taxation rate, loopholes such as tax evasion and avoidance can be used. Also, it may lead to distressed sales for depositing taxes.
• Discourage savings and investment: As individuals may be reluctant to accumulate wealth if a significant portion is to be taxed on inheritance.
• It will discourage individuals from working hard: It may amount to double taxation as assets inherited mighthave been already taxed.
• Affect Business: Many businesses may move their businesses abroad to avoid taxes. It may also force the sale or break-up of family-owned businesses to pay the tax liabilities. 
• Double Taxation Concerns: Critics argue that inheritance taxes represent double taxation, as the wealth being transferred has already been subject to income and other taxes. 

Conclusion

Inheritance tax can effectively reduce wealth inequality, but implementation requires careful balancing to avoid unintended consequences. A well-designed progressive inheritance tax system with measures against avoidance can promote wealth equity while raising revenue for social programs.