Inheritance tax: A good idea, not so easy to implement

On 24 April, Kaushik Basu, former Chief Economist of the World Bank, shared on X (formerly Twitter), "The biggest inequalities in life occur at birth. Some are born abysmally poor, some rich beyond imagination. This has nothing to do with their hard work and has no moral justification. This is the reason why an inheritance tax to curb inequality is a must in any civilised society."

On a separate occasion, the Chairman of Indian Overseas Congress, Sam Pitroda's remarks on implementing an inheritance tax sparked massive outrage in India with BJP terming Congress as "property snatchers." 

All debates aside, the richest 1% own almost half of the world's wealth. Their net worth is equal to the combined wealth of the other 99% world's population, according to Oxfam. This very statistic depicts the world of inequality we live in.

Now, think about their successors. As they would inherit this vast amount of wealth, we may call them 'born rich.' This lottery of birth is likely to exacerbate the world's inequality scene.

But how justified is one small section of people enjoying vast wealth while others struggle? Perhaps that is why economists have suggested levying an inheritance tax on wealth. 

It is a controversial policy, no doubt. Moreover, is it a socially and economically viable policy to curb inequality?

Is it a viable policy for Bangladesh?

First, let us look at Bangladesh. The Bangladesh Bureau of Statistics (BBS) Household Income and Expenditure Survey 2022 revealed that the top 10% of the population owned 40.91% of the nation's total income.

Another report titled 'World Inequality Report 2022' by the World Inequality Lab of Paris, showed that just 1% of Bangladesh's population held 16.3% of the total national income in 2021.

The rising income inequality of the country is fueled by higher wealth concentration. This underscores the need to tax wealth or property to redistribute resources among the most vulnerable and marginalised population of society.

Meanwhile, the tax-GDP ratio of Bangladesh is very low, reported at 7.8% in December 2023 emerging as a structural constraint for our development aspirations. 

At the same time, revenue collection in Bangladesh largely relies on indirect taxes. The share of direct tax has been stagnant at around 33% for the last five fiscal years, being predominantly derived from income.

Looking at the issue of introducing inheritance tax from a border perspective involves the country's tax reforms. For a progressive tax system, we need to look for direct taxes, and inheritance tax is one of those.

"The policy will not be politically popular among the influential. We can be very sure that there will be severe pushback against any introduction of an inheritance tax. I am not sure if it will be a politically feasible one at this very moment," said Dr Debapriya Bhattacharya, Distinguished Fellow at the Centre for Policy Dialogue (CPD).

He highlighted that we may support inheritance tax given that these three fundamental principles are assured— equity, efficiency and transparency.

According to Dr M M Akash, a professor at the Department of Economics of Dhaka University, strengthening our property tax would be more feasible and a better option than introducing an inheritance tax. 

If we implement an inheritance tax, while it may constrain the wealthiest individuals to some extent, however, people won't accept the risk for the poor and the middle class.

Implementing an inheritance tax may prove to be a challenging endeavour given the country's existing limitations in collecting tax income. Wealthy individuals could seek ways to evade the inheritance tax akin to how many commit tax evasion. 

Moreover, they could frequently use sophisticated estate planning techniques to reduce their tax liabilities. This will ultimately leave the tax burden on the middle class and fail to reduce wealth inequality, as expected.

"We can fulfil the purpose of inheritance tax with property tax itself. We have to take three things into account: property tax, progressive property tax and updated valuation of the property," explained Dr Akash.

As per 2021 data, property tax comprises 5.6% of the overall tax revenue for average OECD countries. In contrast, it accounts for only 0.34% of its total tax revenue in Bangladesh. 

So, there are still scopes for making the most of its potential. The CPD believes that with proper implementation, it is possible to collect an additional Tk6,000 crore in wealth taxes.

In a dialogue arranged by CPD last year, Dr Nasiruddin Ahmed, the former Chairman of the National Board of Revenue (NBR), also acknowledged the need for an inheritance tax but stressed the significance of simplifying the existing property tax system before introducing it.

"It is difficult to evaluate property and impose a tax on it. We can start by levying property tax on the richest 10% of the community. Or with those who have two cars, or a land and a house in Dhaka— like this. But again, we have to make sure that property tax doesn't get paired with income tax," suggested Dr Akash. 

In case the property is engaged in some productive activity or generates a flow of income, then income tax is already levied. So, that property might be overvalued and there is scope for double taxation, which is faulty.

"If we ever implement inheritance tax, we have to make sure it is very technically produced and sensitively aligned with our socio-political issues," said Dr Debapriya. 

What happens around the world?

Inheritance tax is a tax on the estate (the property, money and possessions) of someone who has died and it is paid by someone who inherits them. It is also referred to as an 'estate tax' or 'wealth tax' in other countries, and also 'death duty' or 'death tax' informally.

Throughout the 19th and early 20th centuries, the number of countries that adopted the inheritance tax policy increased sharply. However, from 1960 onwards, the number fell as numerous countries repealed it.

At present, inheritance tax policy is effective in several countries in the world. Most European, American and some African nations levy inheritance tax. Additionally, most of them are members of the Organisation for Economic Cooperation and Development (OECD).

Japan has the highest rate (55%) of inheritance tax in the world, followed by 50% in South Korea and 45% in France. The US shares the 4th position with the UK with a 40% tax rate. 

However, in the US, the inheritance tax is not very common. Only six states have levied it: Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.

Most of the countries with inheritance taxes have exemptions to make taxes more progressive. 

For example, in the UK, the threshold is £325,000. The threshold is $1 million in Oregon and $12.92 million in Connecticut. It means the inheritance tax will not be applicable until the wealth reaches this particular amount and the tax will be effective on the additional amount only. 

But due to the high exemption rate, the government's revenue collection turns out low. On average, only around 0.5% of total tax revenue comes from inheritance, estate, and gift taxes in the OECD countries that levy such taxes.

Ariful Hasan Shuvo. Sketch: TBS

One example of a country which repealed the tax is neighbouring India. The country introduced the law in 1953 and abolished it in 1985. 

In 1985, then Finance Minister V P Singh under Prime Minister Rajiv Gandhi abolished it because it did not do much to lower society's inequality. Loopholes in the system meant that many people avoided paying the tax. 

Inheritance tax generally has high compliance and enforcement costs. Assessing the value of people's assets is difficult, and it is not a worthwhile pursuit if those assets are not particularly valuable.