Roving Periscope: Ex-RBI chief Rajan opposes inheritance and wealth taxes

Virendra Pandit

New Delhi: While the Indian National Congress’s election manifesto hinted at redistribution of wealth and its overseas arm chief Sam Pitroda has favored levying of inheritance tax—which has spiced up the ongoing campaign for the Lok Sabha campaign–former Reserve Bank of India (RBI) Governor Raghuram Rajan has opposed this idea.

In some countries where these ‘Robin Hood’ taxes—taking wealth from the rich and giving it to the poor– were attempted, the governments either withdrew them or could collect only negligible revenues. Most of those taxed found ways to circumvent the unpopular taxation.

According to the media reports, speaking at the Kellogg School of Management at Northwestern University, Illinois, US, Dr. Rajan said last week that having inclusive growth is pivotal for accelerating economic progress but he opposed the idea of taxing the rich as a means to achieve it.

“We need to try and elevate others rather than bring the successful down,” he said.

His remarks came soon after Indian Overseas Congress Chairman Sam Pitroda stirred controversy by advocating the exploration of inheritance tax akin to the US model, although America does not have a federal inheritance tax.

“In America, there is an inheritance tax. So, if, let’s say, one has USD 100 million worth of wealth, and when he dies, he can only transfer probably 45 percent to his children, the government grabs 55 percent. That’s an interesting law. It says you, in your generation, made wealth and now that you are leaving, you must leave your wealth for the public, not all of it, half of it, which to me sounds fair.

“In India, you don’t have that. If somebody is worth USD 10 billion and he dies, his children get USD 10 billion and the public gets nothing… So, these are the kinds of issues people will have to debate and discuss,” Pitroda said.

Refuting any political alignment, Dr. Rajan said, “I think we need to figure out how we get the people, who are not doing well, should do better and that will increase growth. Having inclusive growth will increase the pace of growth. And I’m not saying we should tax the wealthy to a huge extent or anything of that sort.”

“And I would say let’s try and elevate others rather than bring the successful down,” Dr. Rajan added.

Meanwhile, experts say wealth and inheritance taxes have been tried in India and should not be resurrected. People respond to incentives. The demotivating ideas of added taxation have been around since the 19th century and tried in many countries. The removal of these taxes, as part of the shift to greater economic freedom, has coincided with greater prosperity.

In India, estate duty was levied from 1953 to 1985, with rates being as high as 85 percent, but, in practice, revenue collection was small. The then Prime Minister Rajiv Gandhi abolished it in 1986.

In the 24 member countries of the Organisation for Economic Co-operation and Development (OECD) the wealth tax collected was a meager 0.5 percent of total tax revenues. But it angered a lot of people who suffered complexities and paid little.

The wealth tax, introduced in India in 1957, fared likewise. In 2012-13, it generated only Rs. 800 crore and was abolished in 2015. Even in the four OECD countries, it generates negligible revenue.

Even otherwise, taxation in India is high. The highest rate of income tax is 42 percent, followed by the GST (28 percent) and corporate income tax (25 percent). Taxing imports, and non-tariff barriers, has also been rising. These all add up to a very high tax environment when compared with most of the post-1991 period.

Tax collection inefficiency is a key reason for the generation of unaccounted (black) money, flight of capital, and relocation of business activities to business-friendly places like Singapore, Dubai, the Cayman Islands, or Ireland.

That is why some experts have advised that wealth and inheritance tax would only disincentivize innovators and wealth creators, harm the GDP, strengthen the bureaucracy, and end up with poor collections—besides angering many. Any idea of redistribution of wealth, as tried in many communist countries, would only weaken growth and lead to the collapse of the economy.