Marxists see ‘profit’ as a category of income arising from a social arrangement, namely the capitalists’ ownership of the means of production, which is originally effected by force and subsequently maintained by the spontaneous working of the system. As against this, the defenders of capitalism argue that profits are a reward for some special quality that the capitalists possess which they bring to the sphere of production; they disagree however on what exactly this special quality is. Classical political economy saw this special quality in the capitalists’ ‘thriftiness’ which resulted in capital accumulation and social progress. Alfred Marshall, the Cambridge economist, attributed this thriftiness to what he called “waiting”, the fact that capitalists, instead of consuming immediately whatever they earned, were willing to ‘wait’ for a later date by which time their foregone consumption would have added to the capital stock and produced a larger output even with a given workforce; a part of this larger output would accrue as higher profit. Joseph Schumpeter saw “innovativeness” as the special quality of the profit-earners, the fact that they introduced new processes and products for which they were rewarded with a ‘profit’.
Let us for a moment accept the argument of the defenders of capitalism and attribute profits not to ownership but to some special quality of the capitalists. But then the children of the capitalists must also exhibit this special quality if they are to be entitled to earn a stream of income called profits. The argument of the defenders of capitalism cannot possibly justify income through inheritance; on the contrary, earning an income through inheritance negates their argument that profits are a reward for some special quality.
In fact, there does not exist any economic theoretical justification for an income being earned through inheritance. Not surprisingly, even advanced capitalist countries have instituted, doubtless under socialist pressure, heavy inheritance taxation in modern times. In Japan, for instance, the rate of inheritance taxation, that is the proportion of a person’s estate taken over by the State at his death, is 55%, and in the United Kingdom and the United States of America it is around 40%. In India, incredibly, there is no inheritance taxation.
The other day, while hearing a petition for deleting the words, ‘socialism’ and ‘secularism’, from the Preamble of the Indian Constitution, the chief justice of India had remarked that the term, socialism, was used there not in any doctrinaire sense but to denote a welfare State with equality of opportunity for all and that socialism in this sense was a basic feature of the Constitution. Income from inheritance, however, flies in the face of equality of opportunity: a worker’s child and a billionaire’s child can hardly be said to enjoy equality of opportunity if the latter can inherit his or her parent’s billions. Even on the CJI’s interpretation therefore the absence of inheritance taxation violates a basic feature of the Indian Constitution.
To be sure, equality of opportunity requires not just inheritance taxation but wealth taxation as well: wealth yields power and a society with great inequalities of wealth cannot possibly claim to provide equality of opportunity to all. Likewise, it requires a government-run quality education system and a quality healthcare system through a National Health Service that can provide universal education and healthcare either absolutely free or at affordable rates. Similarly, a society afflicted with unemployment, with its associated economic and psychological deprivations, cannot possibly claim to provide equality of opportunity.
If the constitutional vision as interpreted by the CJI is to be realised, then action has to be taken on all these fronts. But my focus here is only on inheritance taxation, which is essential not just for equality of opportunity but, even in a partial and watered down version, as a revenue source for essential welfare State measures. According to widely prevalent estimates, the top 1% of India’s population owns at least 40% of the total wealth of the country. The term, ‘wealth’, has somewhat wider coverage than capital stock. But even if we define wealth as just capital stock and take, conservatively, a ratio of 4:1 between private capital stock and the gross domestic product, the top 1% of the population would be holding 1.6 times the GDP of the country as its wealth.
An inheritance taxation that is comprehensive must cover not just what is passed down at a person’s death but also what is distributed over a person’s lifetime (for escaping death duty). Even if we assume that 5% of the wealth of the top 1% of the population is passed down every year, and impose upon it a one-third rate of taxation, this would fetch every year 2.67% of the country’s GDP as additional revenue. This, together with what is the current budgetary expenditure on healthcare, which is just about 1% of GDP, will easily exceed 3% of GDP which, as many knowledgeable writers have been demanding, should be the minimum credible healthcare expenditure. This figure is what the Srinath Reddy Committee, set up by the erstwhile Planning Commission, had wanted in its report. And this is also what Amartya Sen has, for a very long time, been asking for.
Thus, with an extremely moderate rate of inheritance taxation, just one-third, compared to what even advanced capitalist countries currently have, that too imposed on only the top 1% of the population, the country would have taken a big stride towards building a welfare State; no defender of capitalism can even oppose it legitimately on ideological grounds.
