… if you’re looking for the TL;DR, he says They Have Been, Are And Will Be A Very Bad Thing For India:
In India, estate duty was present from 1953 to 1985. The rates could be very high, as much as 85 per cent, but in practice collection was small. It was abolished by Rajiv Gandhi. Taxes on the estate or of inheritance are present in many advanced economies. On average, in the 24 countries of the Organisation for Economic Co-operation and Development (OECD) where these are found, they account for 0.5 per cent of tax revenues. It seems like a lot of complexity to suffer, in public administration, in return for a small amount of tax revenue.
The prospect is even less appealing with wealth tax. This was introduced in India in 1957. As of 2012-13 it generated Rs 800 crore. It was abolished in 2015. It is present in four OECD countries and generates a negligible amount of tax revenue.
So the data tells us that both taxes haven’t done much to raise revenue, and both have been abandoned because they haven’t generated enough revenue.
That’s empirics. What about the underlying theory?
- As he points out, incentives matter. The problem with too high a level of taxation is that you incentivize folks to either work less (yikes!)…
- … Or put in place measures to reduce their tax burden. Time their gifts to their children in such a way that the wealth stays with them for as long as possible, and is then transferred just before their passing, in effect.
- Or, of course, simply exit stage <insert pun of your choice depending on your preference>. Hello Dubai, Sri Lanka, or more exotic locales in the far beyond.
As he puts it, this is really all about growth v. redistribution all over again:
Lant Pritchett says that 99 per cent of the variation in the poverty rate across countries is explained by one number: The median income. If we want to change the poverty rate, the number to focus on is the median income. All the redistributive efforts of the state, through taxes, social programmes, etc sit in the residual 1 per cent (of the variation of the poverty rate which is not explained by the median income) and come at the price of reduced growth of the median income. The emotions of envy, of resentment, of takers rather than makers, should be excluded from public life.
And any economist (myself included) will tell you – or should, at any rate – that growth is of paramount importance for India. As it is, indeed, for any developing (or whatever the politically correct nomenclature is these days) nation today.
So what gives? Why do we still allow the emotions of envy, of resentment, of takers rather than makers to rule over public life?
- Because we do not think of life as a zero sum game, more’s the pity
- Because politicians may not like us economists, but by god they get game theory
- Because Alesina and Rodrik, now what to do.
And above all, what I relief it was to read and get to talk about an economic analysis of the problem at hand. These things are going out of fashion, I tell you, so hajjar thank yous to Ajay Shah!
EconForEverybody 