Estate tax in India is not the answer

India’s business elite has begun to hedge its wealth against the possibility of an inheritance tax staging a comeback. An estate tax on passed-on property was axed in 1985, but word of its revival has been in the air as a measure to boost central revenues for cash handouts and the like.

The case in favour of such an estate tax has long been clear: in a world where the rich inexorably get richer, it could reduce inequality without warping markets. Even Adam Smith championed it.

Globally, however, this tax has been in retreat over the past century. Its popularity has suffered the same fate as socialism. If India is unlikely to slip such a proposal into a budget speech anytime soon, it’s for two clear reasons. For one, even if portrayed as pro-poor, it’s likely to face fierce resistance. This would turn it into a political hot potato. For another, it will probably prove devilishly difficult to apply equitably.

Stocks of wealth are invariably harder to assess than flows of income. Also, assets can be disguised, shuffled, morphed and even transferred abroad to dodge the taxman. All it takes is effort.

In sum, an estate tax might just peeve the rich more than relieve poverty.