Tax Reforms

An Inheritance Tax will help reduce Inequality


From UPSC perspective, the following things are important :

Prelims level: Inheritance Tax and Land Value Tax (LVT)

Mains level: Taxation system in India;

Why in the news? 

A remark by Chairman of Indian Overseas Congress Sam Pitroda on implementing an inheritance tax as a tool of wealth redistribution has sparked massive debates.

The Negative Impact of Inequality:

  • Growth affected: Inequality harms growth in the medium-to-long run by reducing firm productivity, lowering labor income, and diverting resources away from essential rights like education.
  • Inequal Opportunity: In unequal countries like India, where one is born greatly influences lifetime outcomes, with almost a third of consumption variation being explained by the place of residence (state, city, or village).
  • Concentration of Wealth: The richest 1% holding 40% of India’s wealth underscores the vast wealth disparities that exacerbate inequality.
  • Skewed Distribution of Gains: Research indicates that the gains from India’s growth over the last two decades have disproportionately benefited high-income urban residents, further exacerbating inequality.

What is Inheritance Tax? 

  • An inheritance tax is a tax levied on the assets or wealth passed down from one generation to another upon the death of the owner.
  • Unlike a wealth tax, which is recurring and applied to all physical and financial assets an individual owns, an inheritance tax is a one-time tax specifically targeting intergenerational transfers of wealth.


How an Inheritance Tax could help reduce Inequality?

The Constitution mandates equality of status and opportunity, obliging the government to take steps to reduce disparities arising from accidents of birth.

  • Reduction of Wealth Concentration: By taxing large inheritances, an inheritance tax helps to redistribute wealth from the wealthiest individuals and families to the broader society.
  • Encouragement of Productive Investments: Inheritance taxes can encourage wealthy individuals to invest their wealth in productive activities rather than simply passing it down to heirs.
  • Incentive for Innovation: Critics may argue that inheritance taxes disincentivize innovation by reducing the incentive to accumulate wealth to pass on to future generations.
  • Funding for Public Expenditure: Revenue generated from inheritance taxes can be used to fund essential public services and social programs, such as education, healthcare, infrastructure, and poverty alleviation initiatives.
  • Historical Effectiveness: Historical examples, such as the estate duty in India between 1953 and 1985. It reduced the top 1% personal wealth share from 16% to 6% between 1966 and 1985.
Another approach is the Land Value Tax (LVT): The Land Value Tax (LVT) is a tax system that levies charges on the unimproved value of land. Unlike traditional property taxes, which take into account both the value of the land and the value of any buildings or improvements on the land, the LVT focuses solely on the value of the land itself.


Conclusion: Tackling wealth inequality requires a multifaceted approach that includes measures such as inheritance taxation, wealth taxation, and the Land Value Tax (LVT). These measures not only help to redistribute wealth and promote economic fairness but also contribute to fostering a more inclusive and prosperous society where opportunities are more evenly distributed.

Mains PYQ:

Q Comment on the important changes introduced in respect of the Long term Capital Gains Tax (LCGT) and Dividend Distribution Tax (DDT) in the Union Budget for 2018-2019.

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