Inherited Wealth, Justice and Equality

Guido Erreygers, John Cunliffe, Guido Erreygers, John Cunliffe

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781135135263
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

The core of the book consists of a selection of papers presented at an international workshop where researchers from a variety of fields and countries discussed the connections between inherited wealth, justice and equality. The volume is complemented by a few other papers commissioned by the editors. The contributions cover historical, political, philosophical, sociological and economic aspects.

1 The debates about inherited wealth and its taxation

An introductory essay

John Cunliffe, Guido Erreygers and Andrew Reeve

The problem of inherited wealth

The chapters in this volume address the issue of inherited wealth from the perspectives of various academic disciplines, each offering assessments by reference to a literature largely internal to each of them. Historians of ideas demonstrate that disputes over inherited wealth have been central to theories of property over many centuries. Political theorists assess the normative signifi-cance of intergenerational transfers in the light of tensions between the ideals of liberty and equality. Economists consider inheritance taxation in the light of the conflicting demands of equity and efficiency. Sociologists point to the crucial role of inherited wealth in reinforcing social inequality across generations and analyse the reasons behind the intense public opposition to inheritance taxation. These different perspectives identify a set of points which help to explain the profoundly controversial issues involved. The first is that inherited wealth raises in an acute form the especially sensitive fact of our mortality. The second is that this inescapable fate links inherited wealth to concerns over family structures and values. The third is that the huge inequalities in inherited wealth constitute a problem for the ideal of equality of opportunity and other egalitarian ideas. These equality issues alone support arguments for various forms of inheritance taxation. In contrast, the interest in family values, and the emotional weight attached to inherited property, count against any such taxation.

There might be little wrong with inherited wealth if we all received something approaching an equal share. But obviously we do not: inherited wealth is an issue because it is so massively unequal, reproducing social inequalities across generations. Inherited wealth attracts the idea of its taxation to counter this inequality. Since most people would benefit from inheritance taxation, we might expect it to be a popular cause. But the popular cause in many countries is the precise opposite: the abolition of inheritance taxation. This is surprising because only a minority of wealthy individuals — or their heirs — are liable to it, and in any case there are numerous loopholes. Opposition to inheritance taxation is, however, far from being limited to a wealthy minority. There is little doubt that there is a widely shared and deeply felt aversion to any level of inheritance taxation across all social classes, including those who will never be subject to it. This aversion refects a strongly held view that this type of taxation is somehow grossly unfair. The challenge for scholarly investigation is to explain this curious anomaly. Of course, the aversion might be explained by ignorance, or the influ-ence of powerful interest groups mobilized by the wealthy. Again, it might be attributed to the dominance of neo-liberal economic ideas, or suspicion of the state, especially as an agent of social change. Although none of those explanations is irrelevant or totally false, they fail to address the most fundamental point that inheritance taxation forces us to confront the inescapable reality of death, and its impact on those closest to us, both family and friends. Those who support inheritance taxation on egalitarian grounds might adopt the ethos of the rationalist Enlightenment, but they singularly fail to recognize that most people do not follow that ethos when reminded of their own mortality. If, as the saying goes, death and taxes are the only certainties in this life, then the combination of these two certainties is toxic. The very last chance to leave some tangible mark on the world becomes subject to interference by the state, which cannot or will not leave us alone at that last moment. Even if we can have no further use for what was our property, our final will regarding its future should be complied with. To do otherwise is to demonstrate a singular lack of respect for the recently departed in their capacity as agents who might have chosen to benefit those close to them. Apart from solidarity with family and friends over a lifetime, passing on property to them is a continued expression of that solidarity, extending the temporal horizon of the individual beyond death. As the French adage puts it, ‘toucher à l'héritage c'est comme toucher à la famille’ (interfering with inheritances is tantamount to interfering with the family). Of course, scholarly debates can and do present rational assessments of the merits or otherwise of inheritance taxation. When conducted in those terms, however, these debates fail to address the singularly poignant nature of the posthumous transfer of wealth — that it is, above all, posthumous.

Family values

Given this popular sentiment, inheritance taxes are viewed with suspicion because they threaten family solidarity and unity, at the especially sensitive time of the death of one of its members. Legal systems have reached different conclusions as to the specification of those members, together with the extent of their entitlement. Over time and across countries, disputes over the posthumous transfer of property titles reveal three quite different conceptions of the family unit. The first considers each family member as an independent property holder in her own right. This favours bequest and testamentary freedom which grant the present owner absolute discretion over the posthumous disposition of her property. That freedom has been criticized for potentially weakening the family unit, since the donor could act capriciously with the choice of unequal dispersal within the family, or altogether outside it. In that knowledge, donors might use their testamentary freedom as a means of control. Potential beneficiaries could respond as they thought appropriate, doing whatever they thought necessary to enhance their prospects of securing a legacy. The second considers the property of family members in varying degrees as jointly owned, restricting testamentary freedom in favour of a right to inheritance and particularly to equal inheritance within the direct line. This might be against the preferred disposition of the current owner. The lack of discretion is seen as strengthening the family unit. Most legal systems seek to balance the competing claims of bequest and inheritance by allowing some testamentary freedom subject to a guaranteed reserve share for family members. This third conception refects a compromise between the Anglo-Saxon common law tradition which favoured testamentary freedom (at least for personal property) and continental civil law which preferred inheritance. In both traditions, nevertheless, the transmission of property was considered a matter of political and legal convention rather than an expression of some basic right to private property. Even if that right were recognized legally during the lifetime of property holders, it did not extend to the posthumous disposition of their holdings. Which form of intergenerational transmission should be legally required or permitted, and whether and to what extent it should be liable to taxation, were quintessentially political decisions.

The legal privilege accorded to the intergenerational transmission of property within families is traditionally seen as a crucial incentive to the accumulation of wealth over successive lifetimes. This holds in particular for a discretionary bequest regime: under an inheritance regime, the guarantee of a legacy substantial enough to provide economic security might reduce any ambition to work and save. Economists and other social scientists have constructed various models of inheritance but concede that empirical information about bequest motives and incentive effects is extremely difficult to establish. The models distinguish between ‘accidental’ and ‘planned’ transmission. The former occurs not because of any intention to transmit wealth, but because death occurs before precautionary savings to ensure independent financial security in old age are exhausted. There will be an estate even if accidentally: it will go to the family, if there is one, and otherwise to nominated beneficiaries. It appears doubtful whether individuals who have no children are any less inclined to make precautionary savings than those who do. It is equally plausible to argue that their savings might be greater precisely because they have no family to fall back on. The latter, ‘planned’ transmission, can take many forms. The stereotype is that of a capitalist motivation concerned with wealth accumulation across generations. Each successive generation considers its inheritance as a formal or informal trust, which should be passed on in at least an undiminished, and preferably enhanced, form. Planned bequests can take many other forms than the stereotype, according to the particular model of the family: relationship between parents and children can range from altruism, through egocentric manipulation to total unconcern, or any combination of them. In ‘altruistic bequests’, the transmission of property will be based on the preferences of the children; in ‘paternalistic bequests’, it will be based on the view of the parents on what is best for their children; and in ‘strategic bequests’, it will be based on calculations of the extent to which each child supports the parents. Despite the standard claims about the incentive effect of the transmission of property especially within families, the relevant empirical research based on these models is inconclusive. We simply do not know how bequest motives differ between countries or social classes or over time.

There are other traditions, nevertheless, which qualifly or reject the privileged position of transmission within families. In a moderate form, charitable contributions might be encouraged by a favourable tax regime for dispersal beyond the family, whether during a lifetime or at death. These contributions express the particular values of the donor who might not regard the family — if there is one — as the most appropriate recipient, or the state as the most appropriate institution for realizing those values. In a more extreme form, philanthropic foundations might be promoted by preferential taxation, expressing the conception of the community held by their founders, rather than the state. Insofar as there is any dynastic ambition, this would be achieved not through wealth accumulation across generations, but by the founder's memory living on in the name of the institution. In the moderate form, charitable contributions might be regarded as complementing transmission within the family, whereas in the more extreme form, philanthropic foundations might be seen as a rival or substitute for it.

Equality concerns

Despite these connections between family structures and economic incentives on the one side, and intergenerational transmission on the other, there are traditions which point to the unacceptable inequalities it leads to. The most prominent of these traditions is that which values equality of opportunity but there are others which again seek to redress those inequalities albeit in different ways.

The strongest argument for inheritance taxation is that it counters unequal inheritances and unequal life chances which are the product of mere luck. Although opportunities are welcome at any stage in life, these unequal inheritances are received typically not when the beneficiaries are children or in early adulthood, but when they are in their fifties. If the concern is with equal starting points, these unequal opportunities occur at the wrong stage in the life cycle. The extent to which inheritance taxation might promote equal starts depends on the tax yield and whether the proceeds are disbursed especially to benefit those younger age cohorts.

The familiar objective in relation to inheritance taxation is that its rate should not exceed the revenue-maximizing level, in order to prevent the creation of perverse incentives against work and savings, or in favour of inter vivos transfers. Although there might be some punitive level which could generate those effects, it remains singularly unclear what the optimal level should be set at. Given that it is neither possible nor desirable simply to eradicate all forms of partiality within families, or between friends, the issue becomes one of the legitimate scopes of this partiality, when it is expressed through the transmission of material wealth. Of course, there are many other ways of expressing familial partiality, but it would be naïve in the extreme to minimize the significance of inherited economic resources. The problem is the extent to which the concern with equal opportunity can accommodate any privileged tax status for transfers especially within the family, either by exemption and/or a higher threshold. If that tax status is too restrictive, parents will resort to inter vivos transfers of material wealth to their children. If that tactic is countered by constraints on monetized gifts in their lifetimes, parents will resort to non-monetized gifts to seek a positional advantage for their children — especially through education. Given these avoidance tactics, and the cost of countering them, some egalitarians argue that there are other and better ways to promote equal opportunities than inheritance taxation, perhaps through increasing income or wealth taxes.

Aside from the question of yield, current advocates of inheritance taxation — like some earlier counterparts — have developed ambitious and sophisticated projects concerned with promoting the interests of young adults by the appropriate disbursement of tax funds. One way of doing this might be to provide a capital grant to all such adults as their private property, with no conditions attached to its use. Alternatively, the grant might be made conditional on a set of approved purposes. Another and opposed thought is that the proceeds should be earmarked and used to provide better public services directed not at material wealth but improving human capital, especially through investment in education and training. Again, the inheritance tax rate might be modified to promote skipping generations, with bequests to younger individuals being treated more favourably. Or, again, earlier dispersal might be promoted by reducing taxation on gifts inter vivos relative to tax on transfers at death.

In the light of these and indeed other difficulties, it would be optimistic to expect equality of opportunity to prevail over the intense aversion to inheritance taxation, based on the massive emotive weight aroused by the transfer of property at death, and its effect on families. Equal opportunities do not, of course, generate equal outcomes. Inheritance taxation at a sufficient level might prevent or reduce the cumulative transmission of those unequal outcomes across generations. It does not address them, however, over the course of a lifetime, especially if they result in destitution for some. Before the emergence of the modern welfare state with its multiple sources of tax revenue, the proceeds of inheritance taxation could be directed at ameliorating those ex post outcomes, rather than promoting equal opportunities. In the modern welfare state, by contrast, no special significance might be accorded to inheritance taxation, whether in terms of its level or the disbursement of its proceeds. In a more pragmatic manner, inheritance taxation might be regarded as only one component of the overall level of taxation required to fund state expenditure, including amongst other aims the promotion of equal opportunities and redressing unacceptable inequalities in outcome. Inheritance taxation would no longer be seen as a distinctive means of initially equalizing private property, or promoting equal opportunities through public services, or ameliorating those lifetime outcomes. The role of inheritance taxation in financing state welfare in general becomes an issue of political calculation along with the priorities accorded to each of these aims. Policy issues and funding mechanisms are regarded as separate not linked. Modern states have an antipathy to earmarked taxation.

As Jens Beckert (2008) demonstrates in the comparative analysis in his monograph, Inherited Wealth, the development of inheritance practices in different countries refects the tensions between conceptions of the family, concerns with incentive structures, and egalitarian commitments. Diverse interpretations and combinations of these considerations amount to distinctive national traditions. In the US, the controversy has been dominated by those supporting an unqualified bequest regime including incentives to promote charitable foundations, on the one side, against others calling for inheritance taxation on the grounds of equal opportunity. In Germany, opposition to inheritance taxation has been based on the priority of the family unit, whereas support has been motivated by a concern to redress unacceptable inequalities in market outcomes. In France, however, the controversy has concentrated on the general issue of tax equity, with a defence of family property against the view that inheritance taxation could be an instrument of social reform.

An overview of the book

The chapters in this volume reveal that the tensions between the various justifi-catory principles, compounded by the emotional weight attached to inherited wealth, seem likely to provoke continuing and unresolved controversy across a range of academic disciplines. Nevertheless, there is also common ground — but before we identifly the common themes, let us first outline what can be found in each of the chapters.

Historical perspectives

The controversies over inherited wealth are part of wider debates about property which, of course, have a very long history. Virpi Mäkinen considers the debates surrounding the Spanish arrival in aboriginal territory, a debate beginning in the early sixteenth century and lasting some 200 years, by examining Vitoria's contribution in De indis. To consider whether the newer arrivals could have any claim over Indian lands, possessions (or even their persons) required identifica-tion of the relevant legal framework; it also required specification of what was required for an entity to be capable of dominion. Vitoria discussed these problems in relation to ius gentium (the law of nations) but this was connected to natural law. Vitoria has been seen as developing a subjective notion of rights of dominion, contributing to the development of natural law by his conception of individual right in relation to ius gentium, although Mäkinen holds that he drew on both subjective and objective conceptions.

The question of what was required for an entity to be capable of dominion was critical if the legitimacy of claims arising from seizure and enslavement based on the denial of that capacity to Indians were to be rebutted. Mäkinen draws attention to three meanings of dominion in Vitoria's analysis: dominion strictly speaking (a type of superiority); dominion as ownership; and dominion as ability to use something in accordance with law. Vitoria concluded that the Indians could not be denied the capacity for dominion because of unbelief, because sinners can have dominion; nor because of madness, as their affairs are ordered, although only humans could have dominion. Indeed, all humans had dominion over other creatures, a use right which was universal and prelapsarian.

How, then, could property be legitimately divided? Vitoria suggested three methods — by Adam; by an elected ruler; and by common consent. ‘Common consent’ was universally valid under ius gentium and the Indians held their lands by right of first occupancy. Vitoria was able to conclude that the Indians were the true owners of their lands (and could exclude the claims of Spaniards arriving later) and that they had individual dominion (rights to use, transfer and inherit) according to ius genti...

Table of contents

• Cover
• Half Title
• Routledge frontiers of political economy
• Full Title
• Copyright
• Contents
• List of figures and tables
• Notes on contributors
• Preface
• Acknowledgements
• 1 The debates about inherited wealth and its taxation: an introductory essay
• 2 Dominion rights of the aboriginals in Francisco de Vitoria's De indis
• 3 Inheritance and bequest in Lockean rights theory
• 4 Equal inheritance and equal shares: a reconsideration of some nineteenth-century reform proposals
• 5 Are we still modern? Inheritance law and the broken promise of the Enlightenment
• 6 Entailed citizenship
• 7 Equal inheritance: an anti-perfectionist view
• 8 Favouring wealth intergenerational mobility by increasing the inheritance tax: putting the case for France
• 9 Does the financial crisis create opportunities for wealth taxation?
• 10 The economics of wealth transfer taxation
• 11 Inheritance taxation, notions of legitimacy and Bourdieu
• 12 From trustees to wealth managers
• 13 To give or not to give? Inter vivos gifts of mobile property and donor profile before and after the 2004 Flemish Gift Tax Reform
• Index