Is Inheritance Tax the Right Way to Counter Economic Inequality?

We are living in times when wealth is more heritable than any gene. When coupled with an understanding that success and failure in today’s world depend far more on the economic than the genetic accidents of birth, it becomes a scary thought. What scares many is that their future is less likely to be determined by what they achieve than what their ancestors accumulated. Such knowledge does not only demotivate hard working youth but also instills languidness amongst those who feel that their future is secured, thanks to their parents. In the long run, it makes sure that the rich stay rich or grows richer while families with no real inherited wealth continue to struggle in the abyss of poverty. In order to curb the negative effects of inheritance, many governments around the world tax the dead through a mechanism of ‘Inheritance Tax’.

A certain proportion of inherited property is taxed by the government. Unsurprisingly, it is the most hated form of tax in countries where it exists. Surprisingly, it is more hated amongst the poor than amidst the rich. There can be two possible reasons for this. Firstly, the rich always find a way to avoid this system of taxation by exploiting the generous loopholes. And secondly, the poor see the inherited wealth as chance go get out of their cycle of economic distress. There are many reasons why the Inheritance Tax is considered disadvantageous. One practical reason why people do not believe the Inheritance Tax to be the right solution for the problems of inequality is that very few rich ever pay it. As soon as you get really rich, you can create an army of people for you to protect that money. Here, in case of avoiding inheritance taxes you do not even need an army.

One tax advisor is enough. Sometimes you do not even need him. In countries where inheritance tax exists, there are provisions that allow the wealthy to prevent redistribution of their wealth through investing in tax exempt practices such as renewable energy projects and farming, or even creation of family trusts. The next problem is a moral one. It is felt that such taxes strip a person’s right to determine the value of the biggest sentimental gift they ever give in their lifetime. The choice of where one’s inherited wealth should go is a very personal one and many believe that the state has no right to take a slice out of it. It can even make people loose ancestral homes that have been in family for a long time and hold emotional value. The final problem is an economic one.

A heavy inheritance tax can force many family businesses to sell out which can dissuade people into investing in long term businesses. Another argument states that the accumulated wealth of a person is a product of already taxed income. To tax it again can kill a person’s desire to save. First motion for inheritance tax counters against the argument made by anti-inheritance tax believers that it goes against the right of every person to choose what happens with his wealth. It says that the dead have no rights. It argues that when a person dies, they are not affected one way or the other by what happens in the world. So, it should not matter if the money directly and fully goes to a loved one or some part of it is contributed in parts to the needy. Another argument states that the system of inheritance creates hereditary elite which is not good for a society.

It creates an unhealthy society where the most deserving do not get the best opportunities due to their economic situation. However, the major problem both economists and the common people have against the inherited wealth concerns the inequality it perpetuates. A general idea of the share of global wealth tell us that if this system of inheritance is left unchecked, promising people struggling at the bottom will continue to live a life full of struggles. In short, the chasm of inequalities will continue to exist wide and open. While inheritance tax seems like a strong tool to counter economic inequality, it must be applied in a way that ensures it actually does its job and benefits more than it harms. A proper tax slab is the first way to ensure it is followed by transparent mechanisms to ensure that the amount collected goes only to benefit those who actually need it. To counter the Trust gift route, it is suggested that that amount is taxed on the beneficiary’s end at repeated time intervals. A proper system of housing tax can ensure that people do not enjoy more wealth being generated through an immobile asset than the hard work they put in daily.

Picture Courtesy- Chartered Club

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