The Impact of Inheritance and Succession Laws on the Economy: Significance of Inheritance and Succession

Will with Pen

By Pallavi Mall

 

Often inheritance is taken for granted – an individual possesses the right to pass their wealth or property to either their legal heirs or stranger and the inheritor has a right to receive it and that they are entitled to it. When examined, it can be seen that laws of succession play a significant role as they solve the issue of distribution of property over time as each property holder’s death is inevitable. Succession laws do serve some basic functions in the society – through inheritance, a social order of kinds is carried on across time. Additionally, it may encourage individual responsibility in order to provide for dependents. Succession laws along with the concept of private property allow an individual to maintain their freedom apart from the state and society. They also ensure persistence of economic life post death.

Inheritance in itself is a feudal concept – the essential idea was that someone must be there in order to perform the services as per the property. The principle of primogeniture also emerged from this concept, the property passed to the eldest son (and not a female) because it was assumed that he would be able to do a better job. This explains why females did not inherit anything as long as there was a living male belonging to the same degree. Although laws pertaining to succession and inheritance have undergone various alterations all over the world, this remains the underlying principle of the same.

The post-feudal concept of inheritance and laws of succession originates from the notion of the family as a social unit which needs protection and preservation. Accordingly, for instance, when a person dies and is survived by his children and wife, these laws are applied in the attempt to make sure that their basic needs for sustenance are taken care of through the property of the deceased. Such attempts are realised in a situation of intestate succession by figuring out potential heirs and intestate succession, however the testator wishes to as long as it is permissible by the law.

Although, a family cannot be the only point of focus when analysing the significance and functions of laws regarding inheritance and succession. It is seen that a larger number of people who are well off end up making wills as opposed to those who are not well off. When the latter portion do make wills, they are usually simple. Also, it has been established that there is a positive correlation between will making and increasing age. This is due to their anticipation of death and because of the property that they have acquired and are capable of bequeathing. Succession laws change and have to adapt with changes in society and demography. Factors such as divorce rates, same-sex couples, enhancement of life expectancy, increase in live in relationships, declining number of children per family – they all have the power to influence succession laws. A more basic example of this would be the amendment brought about in the Hindu Succession Act in 2005 which finally allowed daughters to be part of the coparcenary in the Hindu Joint Family.

Does Inheritance Enable and Further Capitalism?

Essentially, in a capitalist economic system, what to produce and how much to produce are determined by the forces of demand and supply, rather than through central planning. Furthermore, the majority of the capital goods are privately owned. Although we may presume that inheritance allows for capitalistic ideals to be furthered, Halsett in his article ‘Is Inheritance Justified?’ argues otherwise.

The free market economy can only thrive when it is established upon a rewards system and thereafter incentivising production. Economic agents provide their services and other factors of production and in return for this, they are rewarded by means of a wage. This give and take process incentivises production and productivity. When the concept of inheritance and succession laws are looked at through these lenses, it can plausibly be said that capitalism is restrained. Inheritance and succession confer property upon those who have not rightfully earned it by selling their factors of production – it is a result of a mere chance. This is likely to disrupt the economic equilibrium achieved by the interaction of the market forces thus hindering efficiency. Correspondingly, the ‘invisible hand’ that is supposed to ensure the smooth functioning of the market forces, is undermined.

In a free market economy, therefore, inheritance and succession would run contradict its principles and objectives. Moreover, it also opposes the notion of meritocracy – if individuals in a society are expected to compete with one another, it must be ensured that the rules governing this are just, neutral and consistently applied. Inheritance depletes this notion by diminishing equality of opportunity. Equality of opportunity falls in line with the tenets of capitalism, not equality of outcome. Income disparities are inevitable in a capitalist economy as rewards and productivity are positively correlated. If inheritance and succession is added to this picture, it can be deduced that virtually there is no equality of opportunity – some people are born with initial capital and some are not. For instance, an individual ends up inheriting a large amount of money upon the death of his father; her goes on to invest this money which gets him large amounts of interest in return. He already has a greater income than someone who works much harder in a factory for long hours. This angle of inheritance illustrates that “the rich get richer and the poor get poorer”. Further, it exhibits that inheritance causes social as well as economic inequality.

Should Inheritance be Restricted?

Inheritance enables inequality of income as shown above, however it also enables inequality of wealth. India’s economy displays this well – the Indian economy has witnessed tremendous growth in the past few years. This growth does not emanate without a tradeoff, however. India is known to be one of the most unequal countries in the world. The richest 1% in India accumulated 73% of the wealth generated in the past year. It has been contended by Thomas Picketty in his book that income from capital and inherited wealth have indeed aggravated inequality in advanced capitalist countries; this situation can be remedied by imposing an inheritance tax according to him. Therefore it can plausibly be said that the exercise of inheritance and succession plays a part in perpetuating overall inequality and inequity in the economy.

The Oxfam study done in India shows that a shockingly large amount of wealth concentrated in the hands of the top 1%. A study shows that 40% of the total billionaire wealth in India is inherited. A recommendation made in the policy brief was to re-introduce inheritance taxation – this government tool could tackle the concentration of wealth through redistribution. As per Jeremy Bentham, this form of taxation is optimal as it tends to affect the prospective holder of the property and not the current holder. Undoubtedly, the deceased’s heirs would feel aggrieved but this largely due to current expectancies and norms – over time as this would become internalised, this dissatisfaction would be diminished. Bentham proposed that such a tax could reduce the burden on the weaker sections of the society.

Indian citizens were subject to such a taxation between 1953 and 1985. Inheritance tax then made up 0.4% of the total direct tax revenue received. It was done away with in 1985 and the reason given for the same was that it failed to achieve its purpose – it did not result in the redistribution of wealth among the unequal sections of the society. This tax also proved to be a procedural harassment of taxpayers who had negligible income. However, in the 2018 Union Budget, the government has announced a likelihood of bringing back the inheritance tax.

Many developed countries do levy an inheritance tax on its citizens. Some of those countries are Japan with a tax rate of 55%, South Korea with a tax rate of 50%, United Kingdom and United States with a tax rate of 40%, etc.

In his article ‘Curtailing Inherited Wealth’, Ascher argues for an abolishment of inheritance altogether and it should only be permitted if public policy allows it. Therefore, according to him spousal inheritance should never be curtailed, lineal descendants who are dependents should inherit but their age should be taken account of, lineal disabled descendants should inherit and charity is to be encouraged.

Halsett recommended that a will of sorts be created upon the intestate’s death. Instead of demarcating the shares each heir would inherit, this will would allow the same people to purchase the deceased’s property at prices determined independently. This would take into account that the properties in question are indeed inclusive of family heirlooms, firms etc., and hold sentimental values. In order to aid the family members, the government could provide them with loans.

Can the Restriction of Inheritance be Justified?

Many arguments against restriction of inheritance put forth the point that the testator has a right to dispose the property as and how he wishes to and any restriction posed upon it will result in the violation of such a right. It must be noted, however, that inheritance is a civil right granted by the state to the extent that they have been created and not discovered; and not a natural right. Therefore, the state’s involvement in facilitating the passage of the property is justified and the right is regulated, ergo there is no violation.

In such situations, the state merely plays the role of an intermediary which allows legal heirs to claim their share in the deceased’s property. Their interest in the property is effectuated by virtue of the state which then also legitimises such interest. Thus, this civil right can only be enabled through the state.

One of the arguments in favour of inheritance lays down that it promotes as well as maintains familial values. Family ties remain stronger and closer when there is the underlying presumption that parents will be able to provide for their children even beyond the grave. Inheritance, therefore, allows for maintenance of dependents in the family. Restricting inheritance would also cause deprivation of family heirlooms or other properties which may carry with them an immense amount of sentimental value. If such properties are done away with, rather than passed on to those survived by the deceased then they would be prevented from receiving properties which would of far greater value to them than opposed to those who do get it.

Abolishing or restricting inheritance may have adverse impacts on the economy. This could result in a decrease in savings which would then have a corresponding adverse impact on investment. It should be noted that this is in reference to the private ability and desire to save and invest and not the state’s.

It has also been argued that restriction on inheritance will lead to a reduced incentive to work (which could also adversely affect the economy). However, this can be rebutted; providing for future generations is certainly not the only motivating factor behind work. The future in itself is uncertain and people must have a desire to look after themselves during retirement and old age. People generally have the desire to lead a fulfilling life along with a good lifestyle which would help them attain self-actualisation and protect themselves from future uncertainties.

Inheritance is not the only way by which equality of opportunity gets eroded, however this is one of the ways by which the erosion can be constrained. Inheritance is not something inherent but merely a socially manufactured privilege.

Conclusion

Through this essay my objective was to show the social significance that inheritance plays, however, inheritance remains deeply problematic. One of the most important reasons is that it propagates income inequality and allows for the concentration of wealth in the hands of a few. Inheritance even opposes some of the fundamental tenets and principles of capitalism – it dilutes the concept of equality of opportunity, defeats the free market system. Accordingly, this essay seeks to evaluate whether it would be correct to restrict inheritance through either imposing an inheritance tax, or altogether abolishing it. However, in my opinion, doing away with inheritance altogether cannot be an immediate solution – we have normalised and internalised the concept of inheritance to the extent that abolishing it would cause outrage and various administrative issues. Inheritance tax does seem to be a viable option, however, and keeping in mind the country’s wealth concentration accumulated at the top 1%, efforts should be made towards bringing it back.

 

 

Sources-

LM Friedman, The Law of the Living, the Law of the Dead: Property, Succession, and Society (1966) Wisconsin Law Review

Final Report of the American Assembly on Death, Taxes and Family Property (West 1977)

MJ De Waal, “The Social and Economic Foundations of the Law of Succession” (1997) 8 Stellenboch Law Review

James M. Morton, ‘The Theory of Inheritance’ (1894) 8 Harvard Law Review

David Cherry, ‘Intestacy and the Roman Poor’ (1996) The Legal History Review 155

Hindu Succession (Amendment) Act, 2005, s 6

Adam Smith, The Wealth of Nations (first published 1776, Knopf 1991)

Milton & Rose Friedman, Freedom to Choose (first published 1980, Harcourt 1990)

Ursila, “Richest 1 Percent Bagged 73 Percent of Wealth Created Last Year – Poorest Half of India Got 1 Percent, Says Oxfam India” (Oxfam India January 26, 2018) https://www.oxfamindia.org/pressrelease/2093 accessed April 21, 2018

Thomas Piketty, Capital in the Twenty-First Century (The Belknap Press of Harvard University Press 2014)

A Gandhi and M Walton, ‘Where do India’s Billionaires Get Their Wealth?’ (2012) EPW 40, 11

Sakti Golder, ‘Inheritance Tax and Inequality: Global Experience and Lessons For India’, (Oxfam India, 25 October 2017) https://www.oxfamindia.org/sites/default/files/PB%20Inheritance%20Tax%20%26%20Inequality%20Global%20Experience%20and%20Lessons%20for%20India.pdf accessed 21 April 2018

Jeremy Bentham, ‘Supply Without Burden; or Escheat Vice Taxation (First published 1795)

‘Estate And Inheritance Taxes Around The World – Tax Foundation’ (Tax Foundation, 2018) https://taxfoundation.org/estate-and-inheritance-taxes-around-world/ accessed 22 April 2018.

Trout JJ and Buttar SA, ‘Resurrecting Death Taxes: Inheritance, Redistribution, and the Science of Happiness.’ (2000) 16(4) JL & Pol 765

Ascher ML, ‘Curtailing Inherited Wealth.’ (1990) 89(1) Mich L Rev 69

D. W. Halsett, ‘Is Inheritance Justified?’ (1986) Philosophy and Public Affairs 15

Gordon Tullock, ‘Inheritance Justified’ (1971) 14 The Journal of Law and Economics

Denis Kessler and André Masson, ‘Bequest And Wealth Accumulation: Are Some Pieces Of The Puzzle Missing?’ (1989) 3 Journal of Economic Perspectives.


Pallavi Mall, the author, is a third-year student at Jindal Global Law School.

Featured image source: Jacob Houdijk

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