Wednesday, August 22, 2007

Inheritance, family and the common good

It’s always nice to read something that helps you to crystallise a line of thought in your head – even if it’s not the line of thought that the writer intended.

Daniel Finkelstein thinks we should abolish inheritance tax. He argues that bequeathing money isn’t just any old transaction:

Most parents do not think of their children as just another set of economic actors. They look at them as an extension of themselves. They don’t think just of their own interests but how it will effect their family and future generations. And a good thing too.

That’s true. Parents do care disproportionately – and rightly so – for their own children. They don’t, of course, disdain everyone else’s importance, but there’s a perfectly natural and legitimate favouritism.

He suggests that untaxed inheritance is in fact redistributive:

The transfer of assets from one generation to the next… may not be a redistribution from rich to poor, but that’s not the only kind of redistribution that matters. Inheritance is a redistribution from old to young. And beyond that, the idea that the family’s wealth stays in the family is one way that we signal the obligation that the past has to the present and the present has to the future.
Perhaps you don’t think such signals matter? Well, in the debate on the environment we are constantly being encouraged to think of those who will inherit the Earth. What sort of planet, we are asked, will our children, our grandchildren, live on? …
And if I am expected to think this way in respect of the environment, then I should be allowed to think this way in respect of my estate.

Finkelstein’s got me there: I definitely believe in transferring a good environment to future generations. So, logically, I have to agree that we should transfer wealth to future generations as well. And I do agree.

But which members of those future generations? The thing about the environment is that it’s a public good. I can’t put ‘clean air’ or ‘a stable climate’ in my will, any more than my children could uniquely inherit such a thing (even if I try to specify ‘clean air in this garden’).

I’d want my children (we’re speaking hypothetically) to have a good environment. This, happily, is the same thing as wanting a good environment for everyone, so all our incentives are aligned (apart from those that involve wanting to drive 4x4s and take lots of air travel, but never mind).

So, what about wealth? I’d also want my children to be well-off and have a good quality of life. And, while I won’t care about them nearly as much, I’d quite like other people’s children to be well-off and have a good quality of life too.

Here, though, the analogy breaks down. While I don’t own my own chunk of clean air that I can bequeath as I wish, I will (unless drink and gambling get the better of me) have property to pass on as I wish. Naturally, I’ll want to direct this towards my own children rather than those of random strangers.

But I’m not completely inconsiderate of those other people. Perhaps I could help them out in some small way – but there are so many of them, and I don’t have all their names and addresses. What I really want is some sort of system that will get a little bit of help to these people without getting in the way of me strongly prioritising my own children.

Maybe a system that takes a minority share of the value of my property, over a certain value, and then parcels it out across the country – as cash payments or even in the form of services such as schools, healthcare, police, public infrastructure and the like (all of which my children will benefit from as well).

If say, 40% of any bequest over the value of £300,000 was used in this way, then from a £500,000 will, my children would get £420,000 or 84%. That’s not bad going, considering that there are 60 million people in the country who aren’t my children and probably only a very few who will be. If I have £1m of property, my children will still get a comfortable 72%; if I somehow manage to die with £10m, my children get 61.2% of it.

That’s definitely legitimate favouritism, but in the company of some small measure of wider social concern for the vast majority of ‘future generations’ who won’t be my offspring. All of my wealth will pass on to future generations, with my own children gaining vastly more of it than anyone else. That sounds like a good system. We could call it ‘inheritance tax’.

4 comments:

Cassilis said...

A very powerful response Tom and one I hope you don't mind I fired off in an email to Danny - curious to hear his thoughts on it.

The one flaw I can spot in your reasoning though comes at the point when you say:

But I’m not completely inconsiderate of those other people. Perhaps I could help them out in some small way – but there are so many of them, and I don’t have all their names and addresses. What I really want is some sort of system that will get a little bit of help to these people without getting in the way of me strongly prioritising my own children.

Maybe a system that takes a minority share of the value of my property, over a certain value, and then parcels it out across the country – as cash payments or even in the form of services such as schools, healthcare, police, public infrastructure and the like (all of which my children will benefit from as well).


That reasoning only holds true provided you have faith in the state as a means of providing this 'little bit of help'. That call probably boils down to our basic political leanings to the left or right and I'm not sure I'm on the same side as you on that one.

Tom Freeman said...

Thanks for the reply. After I posted, and my intrinsic leftiness had had a little time to dissipate, an objection along those lines did occur to me: of course one can be socially concerned without thinking that the state coercively taking one's money and spending it as it sees fit is a good thing.

That argument, though, applies equally to all forms of taxation. And while I'm sure some people would follow the logic through, I doubt many would.

Cassilis said...

Danny has responded here should you be interested...

Anonymous said...

People commonly do attempt to provide benefits to others from their estate through provision to charity, often in wills.
Perhaps the individual's choice as to who should benefit in this way is better than the states. You dont, for example, see Bill Gates turning over billions to the US government because he believes he can effect greater benefit to others himself.
Also - "I'm not completely inconsiderate". Well what if some people are? Is the fact that you are not reason enough to compel them towards your viewpoint?
Lastly, why do people always consider it a slam dunk that the rich oppose inheritance tax? Well yeah, of course they do. Those whom it will not affect generally support it. Isnt the tax, therefore, merely an unprincipled exercise of political power?