India’s First Trillionaire,” declared India’s headlines last Monday. This news comes on the heels of Forbes’ calculation that India has more billionaires (in US dollars) than any other nation in Asia ex-Japan. Yet it is also possible that India has more people living at wages below $2 per day (the UN standard for poverty) than any other nation in the world. These two opposing realities are brought about by the same force: birthright.
Of India’s billionaires (and its lone trillionaire), most come from wealth and certainly none come from a family living below the poverty line. To facilitate an egalitarian society, that is to help ensure that a path from pain to privilege is possible, India must reinstall the estate tax, better termed the “equality tax”. At the time of death, any estate valued by accumulated savings and investments at more than $10 million would be taxed at 70%. Many nations have an estate tax with rates ranging from 70% in Japan to 40% in the UK and France.
At a summit of leading industrialists last week, the PM spoke of the need for the wealthy to give back, to lift up the poor and shun the “ostentatious” lifestyle of the West. The equality tax is a concrete measure to help bridge the growing divide between India’s wealthy and poor. It can raise revenues, encourage an egalitarian society and refresh capitalism.
Wealth creation does not occur in a vacuum. It occurs within a society where soldiers protect a nation, farmers feed it, police keep law and order, teachers educate the young and doctors nurse the sick. There is no doubt hard-working people deserve to enjoy the wealth they create, but the role of society in that creation of wealth cannot be ignored. To ensure India’s continued success for generations to come, certain societal conditions must be sustained. Assuming normal life expectancy, an estate tax would generate more than $100 billion in revenue over the next 50 years. The revenues could be used for crucial needs: girl child education, health care for the aged, pay hikes for soldiers and teachers, and essential infrastructure.
Equal opportunities for all and redistribution of wealth are important for the cohesiveness of our changing society. People need to believe their station in life is not governed by the station of their birth. Andrew Carnegie, the early 20th century American financier and proponent of the estate tax, said, “Each generation should have to start anew with equal opportunities.” As wealth in India grows, disparity grows with it. The horrors of crime-ridden Sao Paulo or Rio De Janeiro can be India’s too, if its policies do not reflect egalitarianism.
Refreshing capitalism is another important benefit. Just as anti-trust laws limit the size, reach and power of companies, estate taxes ensure that individuals do not wield too much influence. American Supreme Court justice Louis Brandies once said, “We can have democracy in this country or we can have great concentrated wealth in the hands of the few”; though he spoke of the US, his words are applicable to today’s India.
The three common arguments against an estate tax hold little water in the Indian context. The first rests on legacy. “I earned this money for my kids.” The family unit is the bedrock of society, especially in India. This tradition is honoured by the estate tax, which would only apply to inheritances greater than $10 million. Arguments that it leads to less savings and investment have little credence. Japan maintains a high savings rate and the most billionaires in Asia with a high estate tax. In the US, Warren Buffet, George Soros, David Rockefeller, Bill Gates and his father, William Gates, are all proponents of estate tax. It does not diminish the drive of the world’s richest leaders, all of whom would recognize a good upbringing as the truly valuable inheritance. Some argue that Indian billionaires will leave India to escape estate tax. Save steel magnate Lakshmi Mittal who made his fortune outside India, the fortunes of the rest have been made in India. India could also tax assets upon renunciation of Indian citizenship. But India is where wealth creation will happen this century and Indian billionaires aren’t leaving.
A third argument is that estate tax revenues will disappear into the perennial black hole. That applies to any tax and there are at least two ways around this: (1) Specify the uses for funds collected, with accountability built-in. Gates suggests keeping estate tax funds in an intergenerational trust. India could do the same by focusing revenue on education and child welfare. (2) Allow 100% deduction for donations to limited life charities with ironclad conditions, including that all monies must be donated in 20 years. Gates and Buffet have created such foundations. Entrepreneurs who create wealth in their lifetimes can continue to have a positive impact on society long after they are gone.
As the PM said, “The time has come for the better off sections of our society to understand the need to make... growth... more inclusive… to care for those who are less privileged...; to be role models of probity, moderation and charity.” The estate tax is a proven means of accomplishing just that.
Prashant Agrawal heads an investment fund and is based in Mumbai. Comments are welcome at email@example.com