Wednesday, April 23, 2014

Create Sovereign Wealth using an Inheritance Transfer law

Income inequality is growing and is now considered as the most serious risk to global stability. Sovereign wealth may be a way to fund and manage the growing economic inequality especially in view of  jobless growth.

While countries with natural resources or surplus income may be able to create sovereign weath, how can a country like India create one?

One of the valuable taxation tool to reduce the obvious advantages of being born rich is the inheritance tax. India stopped the inheritance tax in 1985. It is easy to understand the implementation problems. Aside from estimating the value of the assets, how will the inheritors convert assets into cash so as to pay the government?

Current capabilities of technology and software make new options possible which would have been unthinkable using manual systems.

One way would be that a proportion of the assets as per the inheritance tax rate is transferred to the sovereign fund of Govt of India. Operational control of the assets may continue to remain with the legal heirs. However, the appropriate proportion of any income derived from the assets would belong to the sovereign fund.

For example, any residential property would continue to be in the possession of the heirs with no liabilities except when they sell it. Keeping all such records on the computers is trivial.

Such a mechanism would make it possible to have a law which is not riddled with exceptions to minimize unfairness.  Furthermore, as an asset it will provide long term income to the government rather than additional income which is likely to be wasted especially around elections.

Any  issues related to improper reporting of income are no worse than the current experiences and practices in collection of taxes.

If such steps are not taken, it seems inevitable that more and more wealth will be in the hands of increasingly fewer people.

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