Tag: inheritance tax

Ajay Shah on Inheritance Taxes in India

… 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?

  1. 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!)…
  2. … 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.
  3. 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?

  1. Because we do not think of life as a zero sum game, more’s the pity
  2. Because politicians may not like us economists, but by god they get game theory
  3. 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!

The Conversation About Inheritance Taxes that I Would Like to Have

Are machines dystopian, or are humans dystopian? Asking for a blog post.

I am going to give this prompt to a very capable LLM. I would like you to critique this prompt, and let me know how it can be made better. Point out what is missing in terms of the comprehensiveness of my framework, as well as any details I may have missed out on. Optimize for the LLM giving an answer that holistically addresses the problem I am thinking about. We are not as interested in generating an answer to the problem as we are in generating a way to think about the problem. What the problem is will become clear upon reading my prompt. Also rate my prompt (for the parameters we’ve spoken about) on a scale of 1 to 10, where 1 is a poor prompt, and 10 is an excellent prompt. Please give me your reasons for the points I score, and reasons for points you have deducted.

“There has been a lot of controversy recently about whether India should, or should not have, an inheritance tax. I would like you to build out for me a framework to think through the issue. While doing so, I would like you to have a persona that has deep expertise in the global history of public finance, taxation laws, development economics, political economy and welfare economics. I would also like you to be well versed in the history of India’s taxation laws, and in India’s political economy. I would like you to assume that I am a very curious person, but with very little knowledge of economics, theoretical or applied. I like detailed explanations, but in simple English. I would like the framework to contain the following aspects, and please note that I plan to ask the LLM these questions sequentially, with plenty of scope for discussion, pushback and clarification after each question has been answered:

  1. Are there principles that underlie taxation for any economy? If yes, what are they? If not, what should a list of such principles look like?
  2. Within these principles, which will presumably be generic and applicable to all kinds of taxes, what principles might apply to inheritance taxes specifically?
  3. Should an inheritance tax be taxed while the money is still in the account(s) of the deceased individual, or the inheritor’s account? What would be better? For whom would it be better? The person being taxed or the entity doing the taxing?
  4. How should one think about the desirability of having an inheritance tax for an economy? Should it be a function of the number of people in an economy? Or their age? Or their inheritance laws?
  5. Should the state capacity of that economy have a bearing on the issue? That is, it might be all well and good to take from the rich, but does the state have the ability to spend that money effectively?
  6. Should inheritance taxes be a function of how thorough income tax laws are? For example, the higher the number of loopholes in the income tax act, the better the case for an inheritance tax is my line of thinking – is this justified?
  7. What is the history of the development of the theory surrounding inheritance taxes? What about the theory as applied to different geographies, different time periods, and countries with differing stages of development?
  8. Have countries enacted laws with sunset clauses? Why or why not?
  9. Have countries experienced Laffer Curve type problems upon implementation of inheritance taxes? How have these problems been detected, and how have they been dealt with?
  10. Based on our conversations so far, give me your top five “for” and top five “against” arguments for an inheritance tax in India today.”

Here’s Claude’s answer:

“Here’s my critique of your prompt:

Strengths:

  1. Comprehensive coverage: Your prompt covers a wide range of aspects related to inheritance taxes, including principles, implementation, history, and country-specific considerations.
  2. Persona specification: You provide clear guidelines for the LLM’s persona, which should help generate responses tailored to your needs.
  3. Sequential questioning: Breaking down the prompt into sequential questions allows for a structured and focused discussion.
  4. Encouraging discussion: You leave room for discussion, pushback, and clarification, which can lead to a more engaging and informative conversation.
  5. Specific to India: Focusing on India’s context helps narrow down the scope and generates more relevant insights.

Areas for improvement:

  1. Clarity on the target audience: While you mention that you have little knowledge of economics, it would be helpful to specify your background and the purpose of this framework (e.g., personal curiosity, policy-making, academic research).
  2. Prioritization of questions: Consider ranking the questions based on their importance or relevance to your understanding of the issue.
  3. Comparative analysis: You could include a question about comparing inheritance tax policies and their outcomes across different countries, especially those with similar characteristics to India.
  4. Societal impact: Consider adding a question about the potential social and distributional effects of inheritance taxes, such as wealth inequality and social mobility.
  5. Feasibility and alternatives: You could ask about the feasibility of implementing an inheritance tax in India given its current economic, political, and administrative context, and explore potential alternatives or complementary measures.

Missing aspects:

  1. Economic impact: Include a question about the potential economic consequences of an inheritance tax, such as its effects on savings, investment, and capital formation.
  2. Tax evasion and avoidance: Address the issue of tax evasion and avoidance strategies that may arise with inheritance taxes and how to mitigate them.
  3. Interaction with other taxes: Explore how inheritance taxes might interact with other forms of taxation, such as income, property, or gift taxes.
  4. Public opinion and political feasibility: Consider asking about public sentiment towards inheritance taxes and the political challenges in implementing such a policy.

Rating: 8/10

Reasons for the score:

  • Comprehensive coverage of key aspects
  • Clear persona specification and sequential questioning
  • Encourages discussion and focuses on India’s context

Points deducted:

  • Lack of clarity on target audience and purpose
  • Missing aspects related to economic impact, tax evasion, interaction with other taxes, and public opinion

By addressing these areas and incorporating the missing aspects, your prompt could be further strengthened to generate a more holistic and nuanced framework for thinking about inheritance taxes in India.”

Run with this framework, and please feel free to modify it and improve upon it. Please use this framework to have a discussion with an LLM about inheritance taxes. It’s the kind of discussion our ancestors were capable of having re: public policy issues.

Also, feel free to copy and improve upon the framework itself – run your prompts through an LLM to see how you can make your thinking about an issue better.

There is a discussion to be had about how the price, income and substitution effects are at play when it comes to spending time talking with folks online, or spending it talking to LLM’s, but I’d rather not go there for now.

I’ll say this much though: I’m usually quite favorably disposed to the substitution effect.

Harmunia Mode.

Is an inheritance tax a good idea or a bad idea?

Well, it depends.

What does it depend on?

It depends on whether you are a Congress supporter or a BJP supporter.

What else does it depend on?

It depends on whether you are answering this question in 2024, 2019 or 2014.

What does it not depend on?

Economic analysis.

I have read innumerable tweets/messsages today about the inheritance tax. Or death tax. Or estate tax. These are tweets and messages from economic analysts, politicians, think-tankers, journalists and policy makers.

Every single discussion has been about who has said what about inheritance taxes, and when.

Not a single discussion has been about an economic model that underpins the rationale for or against the inheritance tax.

  • What is it about India’s tax buoyancy that justifies (or doesn’t justify) an inheritance tax?
  • What about her demography? Does that have a role to play?
  • What about the loopholes in the Income Tax Act? Do they have a role to play?
  • What about her direct and indirect tax collections?
  • What about threshold limits for imposing such a tax?
  • How and why have other countries done it? Can we learn from their mistakes? Can we learn from their successes?
  • What are the alternatives?
  • If we do implement it, do we keep it in perpetuity?
  • How much money do we potentially raise if we implement it?
  • What might be the downsides?
  • How do we judge the quality of implementation if we implement it?

But no, let’s see who said what and when, call each other names, and prove that we are right and they are wrong. That’ll show them. Bloody losers. It’s because of folks like them that India is what it is today.

https://help.twitter.com/en/using-x/x-advanced-search

Do you want to play the game yourself, and show to members of your tribe how you were right and they were wrong? Click on that link, learn how to search on Twitter by date and by handle, and prove how Your Side Alone Speaks The Truth.

If, on the other hand, you are interested in, y’know, actual economic analysis, allow me to recommend Atkinson-Stiglitz and Diamond-Mirrlees, both from the 1970’s. It’s been a while since I’ve read them, and it’s not a topic I’ve ever particularly enjoyed, but I assure you that these are good places to begin.

But Twitter takedowns are faster and more fun, so there’s that.

As for me and what I think, I think that not only was Amit Varma right about the IPL, but if you ask me, he’s right about the harmunia too.