Opinion | Why Wealth Redistribution Is No Panacea For Inequality

George Orwell's Animal Farm aptly captures the essence of failed utopias through the famous line, "All animals are equal, but some animals are more equal than others." The quote encapsulates the irony of a revolution that ends up betraying its original ideals. It is akin to the radical wealth redistribution ideas that have featured prominently in the political discourse in India over the last few days. In theory, wealth redistribution - through mechanisms like progressive taxation or wealth taxes -aims to level societal inequalities by reallocating resources from the affluent to the less wealthy.

However, such policies often fail to eradicate poverty. Instead, these policies spread poverty more evenly across the population, dampening economic incentives and innovation.

Individual Freedom And Economic Freedom

John Locke argued that property rights originate from the labour one invests in natural resources, asserting that any government-enforced redistribution of wealth infringes on such rights by transferring property without consent. Building on Locke, Robert Nozick's 'entitlement theory' from Anarchy, State, and Utopia states that individuals have a right to property acquired through just means - just acquisition, just transfer, and rectification of injustices. Nozick opposed redistributive policies as being violations of these rights.

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Economists Friedrich Hayek and Milton Friedman linked individual freedom to economic freedom, arguing that government-imposed economic outcomes limit personal and economic liberties. Hayek criticised redistributive policies for not addressing the underlying causes of poverty and creating inefficiencies, while Friedman viewed any economic interference as a curtailment of personal freedom. Both advocated for minimal state intervention in order to preserve liberty and encourage economic efficiency.

In India, the discourse around wealth distribution, specifically the pitch to reintroduce an inheritance tax, has gained traction this election season. Historically, an inheritance or a death tax was positioned as a tool to reduce inequality. However, it often adversely affected the very people it aimed to support: the middle class and the poor. 

The History Of Inheritance Tax

The idea of an inheritance tax is not new to India. The country had such an instrument from the 1950s well up to 1985, when it was abolished on the ground that it led to procedural harassment of a large number of taxpayers against a negligible revenue gain. The levy started for properties worth at least Rs 1 lakh, with a rate of 7.5%. However, the tax was unpopular among people as estate duty rates were as high as 85% on properties whose value exceeded Rs 20 lakh. An audit revealed that the estate tax collection was a negligible percentage of the total direct tax collected by the Centre.

In 1984-85, the total tax collected under the Estate Duty Act was Rs 20 crore, but the cost of collection was very high because the complex calculation structure required a lot of litigation. Former Prime Minister V.P. Singh, who was the finance minister in Rajiv Gandhi's Cabinet, said in his budget speech, "While the yield from estate duty is only about Rs. 20 crore, its cost of administration is relatively high. I, therefore, propose to abolish the levy of estate duty in respect of estates passing on deaths occurring on or after 16 March 1985."

'Material Resources'

Advocates of wealth redistribution in India frequently refer to Articles 39(b) & (c) of the Indian Constitution. Article 39(b) mandates that the ownership and management of a community's material resources be distributed in a manner that optimally promotes the common good. Similarly, Article 39(c) aims to ensure that the functioning of the economic system does not lead to wealth and means of production being concentrated in a way that is detrimental to the general public. However, both articles are part of the Directive Principles of State Policy within the Constitution and are thus not enforceable.

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The interpretation of the two articles, particularly the scope of "material resources of the community", has been a subject of intense legal debate. A critical examination of key judicial decisions illustrates that this term should not be construed to include privately owned resources, contrary to the broader interpretation given by Justice Krishna Iyer in State of Karnataka vs. Shri Ranganatha Reddy (1977). In that case, Justice Iyer posited that "material resources of the community" encompassed all public and private resources. However, this interpretation was not adopted by the other judges on the Bench and they explicitly distanced themselves from Justice Iyer's expansive view.

Legal Uncertainty Persists

Further developments in the judicial interpretation of Article 39(b) appeared in Sanjeev Coke Manufacturing Company v. Bharat Coking Coal Ltd. (1982) and Mafatlal Industries Ltd. v. Union of India (1996). Though these confirmed Justice Iyer's definition, they could not conclusively settle the debate. The contention resurfaced in Property Owners Association v. State of Maharashtra (2002), where a seven-judge Bench of the Supreme Court pointed to difficulties with the broad interpretation that private property falls under "material resources of the community". This led to a referral to a nine-judge Bench for a definitive ruling.

The persisting legal uncertainty underscores the necessity of adhering to a principled interpretation that articles 39 (b) and 39 (c) should guide state policy only in relation to community-owned resources, and that they should influence only the distribution - not the collection - of assets. The intent - as debated in the Constituent Assembly and evidenced by B.R. Ambedkar's rejection of K.T. Shah's proposal to change "material resources" to "natural resources" (Constituent Assembly Debates, November 15, 1948) - was never to extend state control over private property without constitutional safeguards.

Thus, Article 39, read with Article 31(C), should not provide unrestricted power to nationalise private property but should allow nationalisation only as a reasonable restriction under Part III of the Constitution, focusing on the subsequent distribution of assets. This approach not only aligns with constitutional safeguards like Articles 14, 19, and 21, but also respects the property rights of individuals, ensuring that the state's actions genuinely serve the common good and do not pave the way for an overreaching, illiberal regime.

Inheritance Is More Than Material Assets

Finally, the idea of wealth redistribution, especially in the context of inheritance, opens a deep philosophical debate about the balance between individual rights and collective welfare. Inheritance is not merely about the transfer of assets; it's the transfer of a legacy, opportunities, and socioeconomic status from one generation to another. Some may see this transmission as a critical factor in perpetuating inequality, and in many cases, it is. The idea can extend beyond physical and financial assets to include education, cultural capital, and social networks, all of which contribute significantly to an individual's prospects. If we take the argument of redistributing inherited wealth to its logical extreme, it implies a radical disconnection between family lineage and a child's economic future. This notion aligns with the extreme communist ideology that the state is the ultimate arbiter and caretaker of all children, aiming to neutralise the unequal starting points by assuming control over the upbringing and resource allocation for every child.

Calls for wealth redistribution surface often during election cycles, with candidates presenting it as a panacea for all societal inequalities. The approach, however, overlooks the inherent inefficiencies and indirect consequences of such policies. Wealth redistribution, especially in the context of inheritance, challenges the foundational social structures related to family and intergenerational bonds and raises questions about the idea's effectiveness in achieving genuine equality.

Wealth Redistribution Can Stifle Productivity

The inefficiency of redistribution policies is embedded in their potential to stifle economic productivity and innovation. When individuals feel that their personal efforts and the wealth they might wish to pass on to their children could be stripped away, the drive to accumulate resources may diminish, potentially leading to a stagnation in economic dynamism.

Moreover, the concept ignores the complex nature of non-material inheritances, such as education, values, and cultural identity, which are crucial in shaping an individual's capabilities and worldview. The focus on redistributing merely material wealth overlooks the broader aspect of social capital, which must be equitably redistributed through legislation or state intervention without encroaching upon personal freedoms and responsibilities.

Preserving Individual Identity

Philosophically, as John Rawls's 'Veil of Ignorance' suggests, while society should aim to build a structure that offers fairness and equality of opportunity, it must also recognise the limitations imposed by practical and ethical constraints. Severing deep-seated family bonds and homogenising the starting conditions for all, as some radical redistributive approaches propose, may erode social cohesion and individual identity, both of which are fundamental to a functioning society.

In essence, while political manifestos often present wealth redistribution as a straightforward solution to inequality, the idea is not only inefficient but also fraught with ethical dilemmas and practical challenges. Such simplistic proposals appeal to populist sentiments without addressing the root causes of inequality. A more nuanced strategy would involve enhancing access to opportunities through education and economic reforms, which respect both individual liberties and the importance of familial relationships. That is a balanced approach to addressing inequality. 

(Bibek Debroy is Chairman of the Economic Advisory Council to the Prime Minister, and Aditya Sinha, is an Officer on Special Duty, Research, in the Economic Advisory Council to the Prime Minister)

Disclaimer: These are the personal views of the authors