February 19, 2015
https://www.facebook.com/mehtarahulc/posts/10152607706676922
https://www.facebook.com/mehtarahulc/posts/10152607706676922
How X% ET = Estate Tax = inheritance tax is equal to Y% WT = wealth tax, and why wealth tax is BETTER than inheritance tax?
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Estate tax aka Inheritance tax can be seen as "payment of accumlated unpaid wealth tax" .
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Lets take a scenario.
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say cost of asset = say Rs 1 crore.
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say number of year person will live after acquiring asset = say 30 years.
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say wealth appreciation rate over 30 years = 8% per year (I say this because a house we bought in 1983 in posh area of ahmedabad for Rs 5 lakh is now worth Rs 45 lakh and that gives average return of 7.5%)
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say interest rate over 30 years = 10% (thats average rate between 1985 and 2015)
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say wealth tax rate = say 1%
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Now say wealth tax isnt paid every year, but added as debt and interest of 10% is applied on the unpaid debt plus interest. And at the time of death, entire amount is collected.
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Now say entire wealth tax accumulated is collected at the time of death i.e. after 30 years. Say the final amount due to be collected will be X% of final property price. Then what is X?
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It turns out that taking 8% as asset appreciation rate, the final value of property will be around Rs 46 lakhs. And unpaid wealth tax due including 10% interest every year will add up to Rs 16 lakhs. So this is about 35% to 40% .
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IOW, estate tax of of 35% to 40% is equal to wealth tax of 1% , assuming asset appreciation rate of 8% and interest rate of 10%/.
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Or putting other way, instead of taking ET of 40%, it is equivalent to take WT of 1%.
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IOW, for any given tax rate of estate tax, there is an EQUIVALENT wealth tax rate that would suffice.
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======
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Now why is wealth tax SUPERIOR or LESS BAD than Estate Tax.
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It not easy to collect estate tax when person who is dying is a foreners and land in India is owned via company in the same foreign country. eg say company-X of USA owns land in India. When owner of company-X dies, his heir will pay tax in USA and not India !! And thus land in India got trasferred without any tax. Where if the owner was in India, he would have had to pay tax. So estate tax on foreigners who own land in India via companies will be effectively zero. Whereas wealth tax will fall evenly on all -- companies, trusts, individuals etc.
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Also It is nearly impossible to apply estate tax on trusts aka foundations. Whereas wealth tax will fall evenly on all -- companies, trusts, individuals etc..
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Also, when a person dies, sudden huge amount payable will force his heirs to liquidate his companies , assets etc.This reduces number of suppliers and hurts consumers and also reduces number of employers, which damages salaried people.
.
So I support imposing 1% wealth tax a year and oppose SoMoKe's proposal to instead impose 35% inheritance tax.
.
Estate tax aka Inheritance tax can be seen as "payment of accumlated unpaid wealth tax" .
.
Lets take a scenario.
.
say cost of asset = say Rs 1 crore.
.
say number of year person will live after acquiring asset = say 30 years.
.
say wealth appreciation rate over 30 years = 8% per year (I say this because a house we bought in 1983 in posh area of ahmedabad for Rs 5 lakh is now worth Rs 45 lakh and that gives average return of 7.5%)
.
say interest rate over 30 years = 10% (thats average rate between 1985 and 2015)
.
say wealth tax rate = say 1%
.
Now say wealth tax isnt paid every year, but added as debt and interest of 10% is applied on the unpaid debt plus interest. And at the time of death, entire amount is collected.
.
Now say entire wealth tax accumulated is collected at the time of death i.e. after 30 years. Say the final amount due to be collected will be X% of final property price. Then what is X?
.
It turns out that taking 8% as asset appreciation rate, the final value of property will be around Rs 46 lakhs. And unpaid wealth tax due including 10% interest every year will add up to Rs 16 lakhs. So this is about 35% to 40% .
.
IOW, estate tax of of 35% to 40% is equal to wealth tax of 1% , assuming asset appreciation rate of 8% and interest rate of 10%/.
.
Or putting other way, instead of taking ET of 40%, it is equivalent to take WT of 1%.
.
IOW, for any given tax rate of estate tax, there is an EQUIVALENT wealth tax rate that would suffice.
.
======
.
Now why is wealth tax SUPERIOR or LESS BAD than Estate Tax.
.
It not easy to collect estate tax when person who is dying is a foreners and land in India is owned via company in the same foreign country. eg say company-X of USA owns land in India. When owner of company-X dies, his heir will pay tax in USA and not India !! And thus land in India got trasferred without any tax. Where if the owner was in India, he would have had to pay tax. So estate tax on foreigners who own land in India via companies will be effectively zero. Whereas wealth tax will fall evenly on all -- companies, trusts, individuals etc.
.
Also It is nearly impossible to apply estate tax on trusts aka foundations. Whereas wealth tax will fall evenly on all -- companies, trusts, individuals etc..
.
Also, when a person dies, sudden huge amount payable will force his heirs to liquidate his companies , assets etc.This reduces number of suppliers and hurts consumers and also reduces number of employers, which damages salaried people.
.
So I support imposing 1% wealth tax a year and oppose SoMoKe's proposal to instead impose 35% inheritance tax.
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