Does Inheritance of Wealth Contribute to the Inequalities Within a Society?

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POL40130

Development and Global Justice

Dr. Graham Finlay

13203862

20/03/14

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Does Inheritance of Wealth Contribute to the Inequalities Within a

Society?

This essay will attempt to look at the area of inherited wealth within the context of global

justice. This is an important area for consideration as it will highlight the unjust nature of

inheritance. An area of universal consensus in contemporary western society is the belief in

equality of opportunity. However I contend that through unjust inheritance the elite in our

society have an unfair advantage over the general population. This sentiment is held by

many others who have studied the area and can be succinctly conveyed by John A. Brittain's

maxim; "All men are created equal, except the children of the wealthy." (Ascher, 1990: 71) I

believe that in our society, a society that claims to try to eliminate inequalities, inheritance

should be subject to a much higher rate of tax than is currently in practice and this will lead

to a more egalitarian and just society.

The first point that I shall try to resolve will revolve around the question as to whether or

not there exists a natural right to inheritance. In doing so I hope to try to compare the

thoughts of Thomas Jefferson, John Locke and J.S. Mills, along with others. As these men

were some of the leading intellectuals at the foundation of contemporary society I believe

that their thoughts on this subject would be highly valuable in attempting to discover

whether or not inherited wealth is justified. The second part of my argument will critically

evaluate the arguments for and against inheritance tax. I will use the arguments put forward

by Ascher against curtailing inheritance and the arguments put forward by Nagel favouring

inheritance taxes. I believe these two authors provided the clearest explanations of their

respective positions that they take. It must be noted that Ascher is in favour of curtailing

inheritance tax and even goes so far as to introduce his own idea of how inherited wealth

should be taxed, however, he goes into great detail in providing the arguments against his

ultimate position. The final part of my argument will draw on the work of Thomas Piketty

and Emmanuel Saez to demonstrate some real world examples of how inheritance tax can

create a more divided and unequal society. It is my contention that this is the most

important point as theorising about whether or not estate and wealth creates an unequal

society is rather pointless unless one can provide real world examples of injustices occurring

due to policies that reinforce these inequalities. Piketty and Saez's work compares the U.S.A,

U.K and France in 1970 and between 2000 and 2005. The data they provide proves that tax

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systems which do not implement progressive estate, gift and wealth taxation policies

inevitably result in a unequal society in which the elite enjoy unfair privilege.

A Natural Right?

It is simple fact that inherited wealth remains a significant source of inequality in democratic

society. (Levy, 1983: 545, Krugman, 2006) However it is interesting to find out whether this

inequality rises as a result to human greed over the last few decades or whether it is

entrenched in the philosophies western society is based on. Thomas Jefferson, author of the

American Declaration of Independence, held the view that the earth belongs to those that

are living and the dead cannot have a say in what happens their estate after they're gone, as

if that were the case then at what point could it be claimed that the deceased would ever

lose his claim over his property? (Ascher, 1990: 80) He believed that the best way to

maintain a well ordered republic was through the "aristocracy of virtue and talent" instead

of through wealth which is what of would resulted had Jefferson not favoured a steeply

progressive death tax. (Ascher, 1990: 95) It is clear that Jefferson feared that keeping wealth

inside a family would have a detrimental effect on society and his concerns were voiced by

Thomas Paine. Paine believed that the most fundamental part of existing under the

covenant that "all men are created equal" was that each had an equal voice when it came to

electing a government. However, the acquisition of large estates and family fortunes gave

Paine reason to worry that some may have a louder voice than others as money clearly

influenced politics. This led Paine to suggest an inheritance tax rate that rose to 100% on the

largest estates. (Ascher, 1990: 94) This, he hoped, would offset the influence that elite

families would have on elected officials and lead to a fairer more egalitarian society. It is

clear from both Jefferson and Paine's views on inheritance that neither thought it had a

beneficial impact on society.

Locke however took a slightly different approach to the question of inheritance. He argued

in 'Two Treaties of Government' that one had a duty to provide for one's own children, as

children were weak and were unable to provide for themselves. (Ascher, 1990: 76) Locke

believed that children might have a natural right to inheritance, however, he did not expand

on this argument. Instead he continued with the position that Jefferson and Paine would

later pick up upon, claiming that no such natural right to inheritance existed. He held the

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view that one only had a right to whatever one moved out of "the state of nature". That one

was required to join his labour with something to make it one's own property. (Ascher,

1990: 81) Clearly Locke's theory of property could in no way justify any right to inheritance,

as a child places no labour into the property of its parents, and so has no right to claim it as

part of its rightful inheritance. J.S. Mills also came down on the side that one had no natural

right to inherit one's parents fortune. He viewed property as the right of the individual and

inheritance amounted to children receiving an advantage they had in no way deserved.

(Ascher, 1990: 82)

Interestingly Friedrich Hayek comes out in support of inheritance. He points out that

inequalities exist all around society and that the inequality of inheritance is just one of many

wrongs. However, he feels no compulsion to try and rectify this wrong. Hayek argues that

inequalities exist in the education one receives and the benefits one receives from one's

family. There are no possible ways of fixing these non-material inequalities so Hayek sees no

point in fixing the inequalities supported by inheritance. (Ascher, 1990: 90) Putting this

rather weak argument to the side for the moment, Hayek does produce a stronger

argument in the form of lifestyle standards and traditions. Hayek argues that as a child

grows up they become accustomed to a certain standard of living. That throughout their

childhood they adapt their parents lifestyle habits and traditions, which is something that

Hayek believes they will desire to emulate when they become older. The standards and

traditions that they have become used to, and arguable have become a large part of

forming who they are as a person, may come with rather large start-up costs or in general

be an expansive habit. (Ascher, 1990: 90) Should these children be forced to give up

something that have been accustomed to and that has been a tradition in their family? Do

these children not have a right to continue with the same lifestyle that they were brought

up in? Surely these children feel some sort of connection to these activities and denial of

these standards and traditions is a denial of their lifestyle. Ascher does not give this

argument much credit and dismisses it, however, I feel that Hayek has made a rather

convincing argument and that this argument would gain more traction in modern society.

Locke, Mill, Paine and Jefferson clearly argue that no natural right to inheritance exists,

however Hayek does make a convincing case for inheritance rights based on maintaining

standards and traditions. Ultimately though, Hayek's position isn't strong enough to prove

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that there exists an inalienable right to the property of one's parents. With the right to

inheritance clearly not based on any natural right, I will move on to discuss whether any

right to inheritance exists at all. I shall do this by comparing the argument for and against

inheritance.

The Arguments For or Against Inheritance

As no natural right to inheritance exists then it would be wise to question whether there

should be any right to inheritance at all. Ascher sets out some very good points against

curtailing inheritance. The main ones that I will be concerned with are:

1) Incentives to work:

2) Increased consumption and decreased savings

3) Symbolic identification

Ascher points out that one of the reasons that people claim to work is so that they can pass

something on to their children so that they can have a better life than their parents did.

(Ascher, 1990: 100) I believe that this is a valid reason why parents would work so hard. As

Locke pointed out above, children cannot fend for themselves and it is the parents

responsibility to provide for them as best as they can. I do not believe that when children

grow up into adulthood that this feeling diminishes very much. It is a natural feeling to want

to provide for one's children and one that can be very strong. While this is undoubtedly a

reason for one to work it is not the only reason why one does work or accumulates money.

If the state was to introduced 100% inheritance tax then people would still go to work

because they would still need to provide for themselves and their children. One would still

have the ability to enjoy one's money and so would still have an incentive to work. This

argument does fall rather flat as it is rarely the case that one acquires money solely that one

may enjoy it in death. Another point that refutes this argument against curtailing

inheritance is the fact that families with two incomes, but no children generally tend to

work harder than those families with kids. (Ascher, 1990: 100) If it were the case that the

incentive to work was reduced because of the lack of an ability to share one's wealth with

one's children then one would not observe the phenomenon of the two income no children

couple.

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The next argument that Ascher raises to justify an argument against curtailing inheritance is

the increased consumption and decreased savings argument. This argument holds that due

to the fact that one will not be able to pass on one's estate to one's children that one will

spend more frivolously and not save as much which will have a detrimental effect on the

economy. Again the argument is based on the fact that one knows that one cannot

bequeath one's estate onto one's children and so one will not save their money. However,

one must surely know that if one reaches old age, that one will face expensive medical bills

that would quickly eat through any savings if one was not prepared. As countered by Ascher

in article this effect will be nullified by the fact that once a person has the knowledge that

expensive medical bills are just around the corner this will ensure that the consumption

stays low and savings will stay high. (Ascher, 1990: 104)

The final argument that is put forward can claim to carry significant weight. Symbolic

identification refers to the bond that a child might form with a certain art piece, memento

or something else of significant sentimental value. I do not believe that this argument is

dealt with in any convincing sort of way by Ascher and I believe that it is quite hard to justify

the removal of objects of sentimental value from family possession. Ascher argues that a

transfer of any object of sentimental value would not require unlimited inheritance and

suggests that his model would allow a small transfer of a moderate amount of property that

would suffice. (Ascher, 1990: 112) However, one could launch a very valid claim that one has

a sentimental attachment to a childhood home. Would this still come under the modest

transfer that Ascher suggests? Is it fair for the Government to take away one's childhood

home? Although the child may not be the legal owner of the property surely the child has a

stronger claim than anyone else to the house where he grew up? I believe that this is an

issue that Ascher did not deal with and would be, in my opinion, unjust for anyone to

remove the property from the family or even to exact the payment of the house from the

descendants.

So far the argument has dealt with inheritance as a natural right and the reasons why

inheritance might be justified. Now the argument will consider the reasons why inheritance

might be unjustified and even contribute towards widening inequalities throughout society.

To do this I shall turn to Nagel who has set out some rather convincing arguments favouring

inheritance taxes. His main arguments for inheritance tax are:

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1) The wastefulness of unequal consumption under economic inequality.

2) A more specific objection to inherited economic inequality as undeserved, unlike

inequality resulting from differential competitive success.

3) The incompatibility of hereditary class stratification with social equality and a

democratic ethos. (Nagel, 2009: 114)

His first point, quite obviously, carries a great deal of political weight with it. It almost goes

without saying that economic inequality is a prominent problem in most societies and that

inheritance plays a big part in this. As Ascher points out in his article, "inherited wealth

accounts for half or more of the net worth of every wealthy man and for most of the net

worth of equally wealthy women." (Ascher, 1990: 88) As this statement proves, the

reallocation of inherited wealth at death is a critical issue in determining the level of

economic equality within society. However Nagel also counters this argument with the

observation that maybe there is not enough political support in a society to enable the

government to enact legislation increasing the rate of estate tax. (Nagel, 2009: 115) He

believes that that society (in the U.S.) would not be open to the idea that one works hard

their whole life and accumulates a vast fortune to pass on to the next generation only for

the government to take most of it at death. This is a convincing point that Nagel raises and

he deals with it in his next argument for increasing inheritance tax.

Nagel's second argument deals with the belief that inherited wealth is a deserved

redistribution of wealth. Considering current policies on estate tax (which is dealt with

below) it would be hard not to believe that certain people view inherited wealth as a

deserved reward. Despite the fact that many arguments could be made to the contrary this

belief has gained a significant amount of traction. This argument can be countered by Rawl's

'A Theory of Justice'. In his seminal work Rawls points out that people cannot be aware of

what position in society they will be born into. If one had to create a society behind a 'veil of

ignorance' one would have to assume that one would choose an equal society as then one

would then have an equal chance at succeeding. (Fabre, 2007: 5) In this egalitarian society

one would not be able to benefit from one's parents wealth and so one would have to

support an estate tax which distributes the deceased fortune more equally. Nagel follows on

from Rawl's train of thought by arguing that in any just society one benefitting from

inherited wealth would not be a value prevalent in that society. A just society would indeed

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reward any citizen for his hard work and effort, but it must be realised that receiving a

fortune through inheritance is by no means a reward for any hard work. As Ascher points

out in his dismissal of the argument that parents only work hard so as to enable their

children to have a better life does not entitle their children to the rewards of their labour. In

any egalitarian society one would be adequately rewarded for the effort that one puts in but

to be on the receiving end of a vast fortune that one's parents bequeathed onto their

children is undeserved reward for no effort on their part and flies in the face of any rational

sense of justice. Again I feel it necessary to point out that any form of estate tax that I would

be in favour of would undoubtedly allow for a modest transfer of wealth or sentimental

objects from parents to children, however this would not allow for a vast transfer of wealth

between generations.

The most convincing argument, I find, in favour of an establishing a progressive estate tax

policy is the incompatibility of hereditary class stratification with social equality and a

democratic ethos. I feel that this point cannot be stressed enough. The benchmark for any

equal and just society must surely be the ease of social mobility. Any just society will

proudly proclaim their policy of equal opportunity to all; but surely the point of equal

opportunity is to give those who work hard the ability to move up the economic ladder and

those that do not work hard will or are undeserving to be moved down the economic

ladder. One could not rightly claim to live in a free and just society where class stratification

is so deeply ingrained in society that no matter how hard one works or desires to move up

the economic ladder one will be destined to remain within one's socioeconomic group. As

Batchelder points out inherited wealth encourages class stratification and the obvious way

to rectify this problem would be to introduce a sizeable estate tax. (Nagel, 2009: 117) This

would have the effect of ensuring that adult children were not simply waiting to inherit the

vast fortune of their parents after their death but rather were forced to take some

responsibility for their own financial future and so would create a more equal and just

society. It is clear that a society in which there exists an elite class who depend upon the

fortunes of their parents to survive do so, not by talent, effort or hard work, but by luck.

One may argue that intelligence, skill or even discipline are hereditary traits as well but no

matter how intelligent, skilful or disciplined one might be, these traits would be useless and

garnish no reward unless put to good use. The same cannot be said of inherited wealth and

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so it cannot be treated the same. One cannot control the amount of intelligence or talent

another may have and so inequalities will always exist in this area, but it is unjust that one

may have the good fortune to be born into a wealth family and then to inherited this

wealth. Without doubt parents have a duty to provide for their offspring but they do this

through providing good education, good healthcare and good parenting. This are the gifts

that parents have a responsibility to provide to their children but to provide them with

undeserved wealth is a step too far for any egalitarian society.

Living off Inherited Wealth

I do not believe that it is enough to theorise about the potential ill-effects inherited wealth

may have on a society and so now my attention will turn to the real life inequalities and

injustices that are currently being encouraged by government policies regarding estate tax.

This phenomenon has been extensively researched and discussed by Paul Krugman, who is

currently trying to bring this subject into the national discourse in the U.S. In a recent article

he pointed out that six of the ten wealthiest people in the United States are heirs rather

than entrepreneurs. (Krugman, 2014) This highlights the problem, and the injustice, of

inherited wealth, as heirs to fortunes did not work to gain the status and privileges of a vast

fortune but rather were simply on the receiving end of their parents hard work and effort.

However, as Krugman continues it appears the problem gets even worse as, he points out,

when George W. Bush came into office he completely eliminated estate tax under his tax

cuts for the wealthy regime. (Krugman, 2014) It seems somewhat ironic that in a country

where the forefathers, Jefferson and Paine as quoted above, claimed that there existed no

right of the child to the wealth of their deceased parent, George Bush enacted legislation

that ensured the state could not redistribute any of that accumulated wealth.

In an earlier article Krugman points out that while wages have stagnated under the Bush

regime, corporate profits have actually doubled and the gap between the average wages of

workers and CEOs were ten times greater than they were a generation earlier. (Krugman,

2006) It is obvious that the corporate elite are being allowed to accumulate more and more

wealth without the state interjecting to try and alleviate the grow inequalities between the

elite and the average citizen. This has the effect of restricting the social mobility of the

average American. Few Americans can now hope to join the ranks of the elite as no matter

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how well educated or hardworking a citizen might be, the opportunity to rise out of their

current class is actually shrinking. (Krugman, 2006)

This policy of inheritance and, what is essentially, the birth-right lottery has its effects all

over the world as well. Take the case of Latin America were many talented people never got

a chance to reach their potential due to the fact that they were born into the wrong class.

The elitist policies of many Latin American governments led to policies were families of the

elite were given large chunks of land instead of the small farmers who desperately needed

the land to survive. (Krugman, 2006) The policies of these Latin American governments are

essentially the same policies that can be seen in various developed societies today. Polices

seem to be designed to protect the rich and their privileged position, even against death, so

that their descendents can benefit from the same privileges enjoyed by generation after

generation with no chance of redistribution of wealth.

Piketty and Saez demonstrate the growing injustices of inheritance by comparing the U.S,

U.K and France. They claim that estate, gift and wealth tax have always been relatively small

compared to other taxes, which seems to perplex them slightly considering the fact that it is

a tax that, by definition, would affect those with higher incomes more than the general

population and would be a good way to increase government revenue. (Piketty and Saez,

2006: 5) As Figure 1, below, shows, the top percentiles in both the U.S. and the U.K. both

paid relatively little estate, gift and wealth tax, (23.4% and 21.9% respectively in 1970)

considering that the very top percentile (0.01 of the total population) paid an income tax

rate of 32.2% in the U.S. and 69.2% in the U.K. However, both countries paid significantly

more estate tax than France, in which the level was at a much lower 6.9%, despite paying

40.1% on individual income. (Piketty and Saez, 2006: 27) This highlights the fact inheritance

was seen as some sort of natural right in France, whereas in both the U.S. and the U.K. the

government felt it had much more of a right to redistribute one's wealth after one had

passed. It is still interesting though that in none of the three countries was the estate tax

ever above, or for that matter close to, what citizens were supposed to pay in individual

income tax. One can only assume that this is due to the fact that inheritance was seen as the

natural right of children. One should note,

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Figure 1: Estate, Gift and Wealth Tax 1970 (U.S., U.K. and France)

(Piketty and Saez, 2006: 27)

Figure 2: Estate, Gift and Wealth Tax 2004 (U.S.), 2000 (U.K.) and 2005 (France)

(Piketty and Saez: 2006: 27)

0

5

10

15

20

25

P 0 - 90 P 90 - 95 P 95 - 99 P 99 -99.5

P 99.5 -99.9

P 99.9 -99.99

P 99.99 -100

U.S

U.K

FRANCE

0

5

10

15

20

25

30

P 0 - 90 P 90 - 95 P 95 - 99 P 99 -99.5

P 99.5 -99.9

P 99.9 -99.99

P 99.99 -100

U.S

U.K.

FRANCE

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however, that during the post-World War II period the British government demanded an

estate tax of over 70% from its citizens, which suggests that the society was not always so

understanding of the rights to inheritance. (Piketty and Saez, 2006: 20)

Taking a look at Figure 2 one can see a significant change in policy occurring in all three

countries. While France introduced a dramatically more progressive estate tax rate in 2005,

at 24.2% at the top percentile, both the U.S. and the U.K., in 2004 and 2005 respectively,

slashed their respective estate tax rates to 2.5% and 1.5%, at the top percentile. This is a

dramatic shift in policy in both the U.S. and the U.K., where one can only imagine it had a

damning effect on the revenue intake as the fortunes of the elite few increased so

significantly, as pointed out by Krugman above, while the estate, gift and wealth tax

dropped so dramatically. (Piketty and Saez, 2006: 27) It is clear from Figure 2 that the

progressivity of the tax regimes in both the U.S. and the U.K. have declined in the period

since 1970. There has been a noticeable shift in policy in the U.S. brought about by Regan

and Bush and their policies of tax cuts for the rich, which is increasingly leading to an ever

more polarised society. (Krugman, 2006) The inequalities that have been systematically

supported since the 1980s do not seem to be getting better in either the U.S. or the U.K.

while France seems to be moving increasingly in the right direction.

Conclusion

There are many inequalities that exist in contemporary society but , quite possibly, none so

easily reminded as inherited wealth. The very standard of a just society is ensuring equal

opportunity for all. It is extremely clear that due to selective tax policies implemented by

various governments, that the inequalities due to the unjust inheritance of vast wealth is

simply not a concern. One may take a look at the influential role that money plays in politics

and question why those that are in power do not seem to possess the political motivation to

increase the rate of tax on wealth passing between generations. It seems plausible that

those who enjoy the benefits of the current system do not want the status quo to change

and so it seems inevitable that this form of inequality will continue unimpeded.

I believe that the main point to keep in mind in a discussion over inherited wealth concerns

its ability to maintain class stratification. With the current policies that are in effect,

guaranteeing that the estate of the deceased will be untouched by the government, it

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seems more likely that the opportunities that exists for those in lower socioeconomic

classes to improve their lot will be reduced even further. For a policy that could potential

gift any government additional revenue that could be put to good use on various cash-

strapped social programmes, it appears that the protection of inherited wealth is one of the

most unjust areas in contemporary society.

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Bibliography

Ascher, M. L. (1990) 'Curtailing Inherited Wealth', Michigan Law Review, 89(1), Oct 1990, pp.

69 - 151.

Fabre, C. (2007) 'Justice in a Changing World', Cambridge: Polity Press

Krugman, P. (2014) 'Living off Inherited Wealth gets Blessing of Republicans', The Irish

Times: Business, 25 March, p.1

Krugman, P. (2006) 'The Great Wealth Transfer', Rolling Stone, 30 Nov., [Online], Available

at:

http://www.rollingstone.com/politics/story/12699486/paul_krugman_on_the_great_wealt

h_transfer (Accessed: 20/03/14)

Levy, M. B. (1983) 'Liberal Equality and Inherited Wealth', Political Theory, 11(4), (Nov.,

1983), pp. 545-564

Nagel, T. (2009) 'Liberal Democracy and Inherited Inequality', Tax Law Review', 63(1), pp.

113 - 121

Piketty, T. and Saez, E. (2006) 'How Progressive is the U.S. Federal Tax System? A Historical

and International Perspective', NBER Working Paper Series, July, [Online], Available at:

http://www.nber.org/papers/w12404 (Accessed: 20/03/14)