Tag: redistribution

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!

Links for 19th March, 2019

  1. “Why do two people need a scrap of paper except to reassure them there’s concrete proof of their relationship?”
    … is a question worth asking in many respects, not just relationships. But some articles don’t really need to be subjected to analysis. A truly beautiful read, by Priya Ramani.
  2. “The episode is symptomatic of a fundamental European problem: unlike in China, macroeconomic policy, industrial policy and foreign and security policy are run independently of each other. The Huawei 5G bid shows that the EU is not well prepared to deal with a connection between security and industrial policy. Nor have the Europeans paid much attention to the impact of their fiscal rules — not least on defence and security policies. China, by contrast, has an integrated approach to economic and foreign policy.”
    Wolfgang Manchau on China and Germany, and who will have the upper hand going forward. Also an interesting way to think about what works better – top down approaches, or decentralized decision making. I usually find myself in favor of decentralization, but this article made me think about that a bit.
  3. “Second, growth in India has been unequalising because the top 10 per cent have benefitted disproportionally more from it than the bottom 90. In addition, growth has been unequalising across regions and ethnicities. In these circumstances, arguments for direct transfers are in vogue to compensate for this failure, not to address it.”
    Rathin Roy in an excellent article explains why we spend far too little on far too many things (and when I say we, I mean the government). Two things: this, theory suggests, is inevitable. Two, the column doesn’t mention – probably because of lack of space – the political compulsions that make this all but inevitable. But it is a great read!
  4. “Economists and commentators who have written on UBI for India have made the case for doing away with many subsidies and exemptions. The problem is that doing so may not be politically feasible. How does any politician sell the taking away of food subsidies to the masses of the country? Or how does any politician justify the introduction of tax on agricultural income or the introduction of estate duty or doing away of subsidies on urea and other fertilizers?”
    And while on that topic, Vivek Kaul in ThinkPragati reviews a book about Universal Basic Income by Guy Standing. I have not read the book, but the quote above jumped out at me. In my opinion, the problem with implementing UBI in India is not an economic one, but a political one.
  5. “Olive trees follow a pattern known as alternate bearing, with bad years routinely followed by good. This year, the EU expects Europe’s overall olive basket to be saved by a surge from its biggest producer, Spain.A trend there towards super intensive plantations may partly mitigate climate change impacts, according to Valentini – but at a cost to traditional farming and biodiversity. Fast-growing, high-density olive plantations might be more drought-resistant but water resources could also be limited by these plantations, he said”
    Will future generations understand the phrase “like taking coals to Newcastle”? Italy – and I cannot believe I am typing this out – will import olives this year. Whatever will the next Mario Puzo do?