Sam Pitroda is Right. India Needs Inheritance Tax to Prevent Concentration of Wealth at the Top

Prime Minister Narendra Modi and the BJP are busy pillorying the Congress party for a comment by Sam Pitroda, chairperson of the Indian Overseas Congress, on the desirability of an inheritance tax in India. While Pitroda merely suggested that the country could look into such a tax system, the BJP has successfully made it appear as if it is indeed the Congress’ official policy proposal. On cue, most commentators and even avowedly independent media outlets have joined the debate and argued that Congress can never shed its socialist instincts and penchant for redistributive economic policies. The BJP and its sympathizers claim that an inheritance tax will be disastrous for the economy by killing the exuberant entrepreneurial spirit. 

The ‘redistributive’ argument against inheritance tax is very specious at best. Any progressive tax structure, including personal and consumption taxes, is redistributive by definition. Those who make more money pay more income taxes at higher rates and those below the exemption limit pay no taxes at all. Similarly, a higher GST rate of 18% or 28% applies to so-called luxury goods while most food items that the common man consumes have lower GST rates. Doesn’t the government pay out subsidies and direct transfers to the poor from the higher income taxes and GST paid by the more affluent population? When that is indeed the case, why aren’t these taxes considered redistributive?

It is widely argued that an inheritance tax will encourage tax evasion and increase the level of unaccounted (black) money in the system. Again, when most affluent citizens are already taxed at multiple levels – on income, capital gains, consumption, and so on – it is almost silly to argue that one more tax will make everyone more dishonest than they were before. Even if that were to happen, it is well within the capabilities of the tax department with its modern technological and analytical tools to ensure compliance.

The next argument against the inheritance tax is that, after the collection costs, it nets very little to the government. Indeed, India had an estate tax in place for three decades before the central government abolished it in the mid-1980s. Ignoring Modi’s insinuation that Rajiv Gandhi did so to save tax on inheriting his mother Indira’s wealth, the real reason for getting rid of the estate tax was that it had become too cumbersome to administer and brought in meager revenues. This is the experience of most countries with inheritance or estate taxes. 

In the U.S., total receipts by the federal government from estate and gift taxes for the year 2023 were just over $30 billion, or only 1% of total revenues. One of the reasons for the modest receipts by the government is that most of the ultra-wealthy Americans give away their wealth to tax-exempt institutions and causes instead of passing on to their children. It is estimated that individuals, companies and foundations in the U.S. gifted nearly $500 billion to charitable causes in the year 2022.

Just as we don’t believe corporate monopolies are desirable even if they are very efficient and profitable, extreme wealth concentration in the hands of a few families for generations is not healthy in a democratic society. 

An inheritance tax is one of the most potent tools for democratic societies to limit dynastic wealth perpetuation, promote economic and social mobility, and make the economy more dynamic in the long run. India has become indisputably one of the most economically unequal societies in the world, especially over the last decade. The number of dollar billionaires in India continues to go up every year and the 30 richest Indians now have a combined net worth of over $600 billion. India has one of the lowest corporate income tax rates among major economies. The resultant boost to business profits has played a large enough role in pushing up stock market valuations and making the wealthy even wealthier.

Free market proponents argue, and most reasonable people would agree, that the best way to reduce economic inequality is to increase the income opportunities for the poor rather than take away from the rich. The remarkable progress in poverty reduction made by several countries including India over the last few decades vouch for this approach. Yet, just as we don’t believe corporate monopolies are desirable even if they are very efficient and profitable, extreme wealth concentration in the hands of a few families for generations is not healthy in a democratic society. 

There is nothing wrong with making money, growing your family wealth, and passing it down to future generations. But for the society as a whole, it would be very regressive if the bulk of the economic opportunities accrue to a handful of clans who are allowed to dominate the economic sphere only because they happened to be immensely wealthy, to begin with. Needless to say, India has already traveled way down that path.

The best and most reasonable argument against an inheritance tax is that it places a very heavy burden on small and medium-sized family businesses that want to keep the ownership to themselves. It is also the easiest hurdle to overcome, by keeping a high enough exemption level. In the U.S., the federal estate tax exemption is as high as $13.61 million for an individual or $27.22 million for a married couple for this year. Few small business families would exceed that limit of $27.22 million, or almost Rs. 230 crores before they have to pay any estate tax on inheritance.

So, what should the Congress party and Rahul Gandhi do? Repeated denials and disowning Pitroda have little chance of success against the BJP’s propaganda machine. Instead, they should openly embrace the idea of an inheritance tax and aggressively take the fight to the BJP by highlighting the ruling party’s proximity to the wealthiest families in the country. To make the inheritance tax structure effective and to blunt allegations that Congress is out to appropriate everyone’s hard-earned wealth, the party should propose the following:

Inheritance tax of no more than 30% on wealth transferred from one generation to another. An exemption limit of Rs. 1,000 crores for a married couple, which means this will only affect the ultra-wealthy or the 0.01% at the very top of the wealth pyramid. This can be availed as a one-time exemption in a given year, or cumulatively over their lives.

Additional exemptions will be available for donations and transfers to charitable trusts and foundations. If such foundations are established or controlled by the donors themselves, they will have defined annual spending requirements and their investments in related companies will be restricted. 

Receipts from this tax will not go to the general government fund. Instead, they will be deposited in a dedicated Education and Healthcare fund – to be utilized only to construct healthcare facilities and educational institutions. Parliament will have supervisory authority over this fund and an annual report will be tabled, separate from the union budget.

This tax will make available a large pool of funds for improving the healthcare and education infrastructure of the country – either directly by the government from the taxes collected or from donations by wealthy families to avoid the taxes. Assuming current aggregate wealth of $1 trillion for ultra-wealthy families, this could generate up to $300 billion within a generation for healthcare and education-related investments. This tax will progressively reduce the dominant family control of some of the country’s largest companies and increase public ownership in those companies. Finally, and most importantly, this will restrict and possibly reduce dynastic wealth perpetuation and the formation of monopolistic business conglomerates with excessive influence over government policy.

Presented this way, most reasonable citizens can clearly see the merits for themselves and the society as a whole and it will be hard for the BJP propaganda machine to counter. Any takers in the Congress party?

(Top photo, “Inequality in Mumbai, India – where over 60% of the city population lives in slums,” courtesy of Unequal Scenes by photographer and multimedia storyteller Johnny Miller. A Senior Fellow at Code For Africa, and a Senior Atlantic Fellow for Social and Economic Equity at the London School of Economics, Miller is interested in exploring social justice issues from the ground and from the air.)

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Litcy Kurisinkal, a Research Consultant focusing on human rights, labor rights and political advocacy, is a Public Policy Graduate from Harvard Kennedy School.