Inheritance

Richard E. Wagner

Private property, freedom of contract and personal liability provide the cen­tral legal framework for a market economy, as Walter Eucken (1952) explains in his well-known statement of Ordnungstheorie.

A pure regime of collective inheritance is almost certainly impossible in modern societies. There are several related reasons why any effort to tax estates at 100 per cent would collect little, if any, revenue. The effort to impose such a tax would induce people who had accumulated wealth during their lifetime to consume it before their death, by doing such things as converting that wealth into annuities. It would also induce such people to transfer more of their wealth while they were alive, though this possibility would also lead the state to attempt to tax gifts, which in turn would further induce prospective donors to seek methods of doing this none the less. Furthermore, deaths typically are known to heirs before they are known to tax officials, and collective inheritance would surely induce heirs to scavenge among the decedent’s assets, particularly among those assets for which titles are not recorded publicly, before officers of the state even arrive on the scene to press their claims.

To avoid such an impossible situation, states stop well short of 100 per cent rates of taxation and generally confine tax liability to what are consid­ered to be comparatively large accumulations of wealth. A state that sought to maximize the revenues it could collect from a tax that it imposed on the wealth of decedents would be well advised to keep its rate of tax well below 100 per cent and to limit the base to relatively large estates. This is not to claim that such a revenue-maximizing approach would be desirable, but is only to say that there is a pragmatic limit to the extent to which inheritance can be collectivized. Total collectivization is simply impossible and the maximally attainable extent of collectivization will still involve some sem­blance of free inheritance.

Despite this pragmatic recognition of the limits to the collectivization of inheritance, conceptual clarity concerning alternative approaches to inherit­ance is promoted by considering the polar alternatives of free and collective inheritance. What does it matter whether inheritance is free or collectivized, since in any event the extent of collectivization will necessarily be incom­plete? Is free inheritance socially beneficial, in which case inheritance taxation could be socially destructive, or might free inheritance be socially destruc­tive, in which case inheritance taxation might be socially beneficial? For the most part, the arguments for collective and free inheritance mirror one another, with each claiming to be part of a programme for human flourishing.

Collective inheritance and equal opportunity

There seem to be two sources of support for some collectivization of inherit­ance through taxation, one grounded in claims of self-interest and the other in claims of social benefit.

Most of the support for inheritance taxation, however, has been based on some claim of fairness joined with claims about the characteristics of a good society. This support for some collectivization of inheritance is often stated with reference to the deformities that are alleged to be generated by free inheritance, and which are claimed to be amenable to mitigation through the collectivization of inheritance. Through its ability to magnify and transmit material inequality across generations, a regime of free inheritance is alleged to inject elements of a caste system into society. People become wealthy, not because of what they have accomplished, but because their parents were wealthy. Others become poor, not so much because of failings on their part, but because the posts of accomplishment in society will have been foreclosed to them by the transmission of material position through inheritance. The claim in this respect is that free inheritance impedes the failure of children from rich families while concomitantly impeding the success of children from poor families. It is as if there are only so many corporate chief executive positions in a society, and for every such position that is filled through inheritance an opportunity to attain such a position is closed to those without such inheritances.

By reducing the advantages that parents can transmit to their children, some collectivization through taxation is argued to be a means of promoting some measure of equality of opportunity within a society. To be sure, more than material wealth is transmitted from parents to children, so the ability of collective inheritance to promote equal opportunity will be similarly limited (Meade, 1973). None the less, it would be easy for proponents of collective inheritance to argue that some effort to promote equal opportunity along those dimensions that are susceptible to such promotion is surely better than failing to do so, simply because there happen to be other dimensions that are not so susceptible to such promotion.

In a commonly used analogy, the receipt of an inheritance is treated as being similar to the receipt of a head start in a footrace. The collectivization of inheritance is construed as a means of helping to promote equality of opportunity, which in turn is construed as a situation where everyone starts the race from the same position. The popularity of this footrace analogy surely lies in its transparent simplicity. If economic life is analogized to a relay race, free inheritance gives head starts to those racers in any cohort who receive the baton ahead of the pack. Free inheritance creates a relay race where the time of departure from the starting line for any particular runner is governed by the speed at which his forebears had run their legs. By contrast, collective inheritance would convert this relay race into a series of independ­ent stages, one for each generation. Or at least this would be the idealized accomplishment of collective inheritance, keeping in mind the caveat that there are many forms of inheritance besides material wealth transmitted at death.

The very simplicity of the footrace analogy seems often to overshadow its dubious relevance. A footrace is a zero-sum game. Whatever increases the odds that one particular racer will win must necessarily decrease the odds that other racers will win.

Claims about equal opportunity and collective inheritance are often rein­forced by claims that earned wealth is morally superior to unearned or inherited wealth. The widely-cited Rignano approach to inheritance, for instance, would apply only a 50 per cent tax to the first generation of inheritance but would confiscate any transfer to a second generation. This represents one effort to institutionalize a belief that inherited wealth is normatively inferior to earned wealth, and with the degree of inferiority rising as time passes. To a large extent, this claim of inferiority involves a presumption that wealth can per­petuate itself without effort, as illustrated by simple analogies based on annuities and compound interest. This formulation makes it seem as though people can live on the unearned incomes that they have received through bequest, instead of earning their own way in society. It is undeniable that a large fortune can support a lot of slothfulness and indulgence for its heirs. It is also undeniable that such a fortune will be a fortune that is on its way to dissipation. While assets can be sold and annuities purchased, wealth will not perpetuate itself without effort, regardless of how that wealth has been at­tained.

Moreover, there can be no doubt that the inheritance of material wealth is socially beneficial. We are all vastly better off today than our forebears of yesteryear because of the legacies that they have left us. To be sure, propo­nents of collective inheritance do not seek to abolish inheritance, but only to subject it to some partial collectivization. In so doing, some tradeoffs would have to be faced. One element of that tradeoff concerns the value placed on equal opportunity relative to that placed on personal liberty. Another element concerns the degree to which the collectivization of inheritance will reduce the value of the legacies that decedents bequeath. Both elements would be part of anyone’s evaluation of alternative inheritance regimes. It is possible that someone could think that the aggregate volume of legacies would decline sharply as tax rates increased and yet support inheritance taxation, because equal opportunity is valued highly relative to liberty. It is also possible that someone could think that inheritance taxation would exert a relatively modest depressant effect on the volume of legacies and yet oppose such taxation, because of the relatively high weight placed on liberty. In any case, a good deal of the controversy over the taxation of inheritance has concerned such things as the rate at which increased taxation reduces capital accumulation and the relative weights to be placed upon equal opportunity and personal liberty. At base, the central concern of this controversy is whether free inher­itance or collective inheritance is more consistent with human flourishing.

Free inheritance and human flourishing

Two of the primary institutions of civil society are private property and the family. Free inheritance supports both of these institutions, while collective inheritance subverts both and with the degree of subversion varying directly with the rate of tax. The attack on private property and the family that collective inheritance represents, no matter how incompletely collective it might be, resonates well with the famous controversy between Plato and Aristotle regarding the rearing of children. In The Republic, Plato advocated that children be taken away from their parents and raised in common. The argument for doing this was grounded in equal opportunity. If children were raised by their own parents, some children would be advantaged relative to others because of differences in family settings. Plato presumed that, if all children were raised in common, the advantages that particular children derived from being raised in particular families would be abolished, because under the Platonic system all parents would treat all children equally. The problem with this alternative, Aristotle noted in his Politics, was that all parents would treat all children with equal indifference. As Aristotle summar­ized, ‘it is better to be own cousin to a man than to be his son after the Platonic fashion’. For children to be raised with parental interest and not indifference, it is necessary to call upon the natural partiality of parents for their own children.

The Platonic scheme may well reduce the variability among the members of a particular generation that arises from differences in family settings, but only at the expense of weakening private property and the family and em­bracing the consequences that would stem from that weakening. Families differ widely in the legacies they transmit to their children. The taxation of inheritance seeks to pare down the legacies that particularly successful fami­lies are able to leave. If flourishing were a zero-sum condition, where more flourishing for some meant less flourishing for others, this might create some greater spread of flourishing throughout a society. But the extent of flourishing within a society is a variable and not a fixed condition, and societies with free institutions flourish more fully than societies with highly collectivized insti­tutions, as Aristotle recognized relative to Plato.

This raises a fundamental disjunction concerning two ways of approaching equal opportunity and inheritance. The common approach seeks to promote equal opportunity by restricting the ability of the relatively successful to leave bequests. An alternative approach to human flourishing would look to the elimination of negative legacies as an important element in a positive programme for a flourishing society. Rather than seeking to penalize those who were successful in creating positive legacies, it would seek to cultivate conditions that were less conducive to the persistence of negative legacies. Such a programme for a flourishing society would seek to reform those institutions that restrict opportunity, rather than to curtail those institutions, such as private property and freedom of inheritance, that foster it.

What such an approach would look like would go well beyond the bounds of this entry, though a few points can be made briefly in passing. For one thing, such an approach would point in part to territory that is now under examination in the widespread rethinking of the welfare state that is well under way (for an interesting collection of essays in this respect, see Ebeling, 1995). In this rethinking, it is coming to be recognized increasingly strongly that it is impossible to offer guarantees of income in one form or another without at the same time undermining the exercise of those human faculties that are essential to human flourishing. Programmes that encourage what are little more than children to have children do not cultivate conditions condu­cive to flourishing. Nor do programmes that substitute welfare cheques for the application of effort and the exercise of providence.

A related issue concerning the requisites for human flourishing concerns the place of wealth and inheritance in the creation and support of various publicly beneficial institutions and organizations that typically cannot be supported through normal commercial channels and yet undertake activities that are also undertaken by states. These include a variety of charitable organizations, museums, hospitals, educational establishments, foundations and the like. There is both good reason and credible evidence in support of two related propositions: first, state provision crowds out private provision; second, private provision is often more effective than state provision in pro­moting the requisites for flourishing. By promoting the substitution of state provision for private provision, the collectivization of inheritance would thus seem to retard human flourishing.

Inheritance, democracy and institutional complementarity

The performance properties of any particular institutional arrangement will depend on the larger institutional framework within which that arrangement is embedded. Within a regime of liberal democracy, free inheritance pro­motes human flourishing while collective inheritance restrains it. Within the framework of liberal democracy, the state is subject to the same principles of property and contract as are other participants in society. Liberal democracy generates a system of open competition, governed only by the general prin­ciples of property and contract. All wealth positions are open continuously to challenge, and a regression towards the mean characterizes relative wealth positions through time, both within the members of any particular generation and across generations.

The institutions of liberal democracy have been under strenuous challenge from those of social democracy throughout the twentieth century. Under a regime of social democracy, the state is not limited by the same principles of property and contract that limit other participants in society. Rather, the state becomes the arena where property rights are determined, revised and extin­guished. It is also an arena where the substance of contract can be amended through legislation and regulation. Competition is no longer open, as gov­erned only by the principles of private property and freedom of contract. To a large extent, competition becomes closed and moderated through the state. Established wealth positions attain some shelter from open competition through the political purchase of favourable legislation and regulation that act as a form of insurance against the erosion of those wealth positions through competition. With the state becoming a partisan of those who are established and with the complementarity that results between wealth and power under social democracy, the natural process of regression towards the mean may be slowed. This illustrates how questions concerning the institutional arrange­ments governing inheritance are ultimately connected with questions concerning the entire system of institutional arrangements for governing our relationships with one another.

Bibliography

Aristotle (1946), The Politics, ed. and trans. by E. Barker, Oxford: Oxford University Press, p. 45.

Becker, Gary S. (1981), A Treatise on the Family, Cambridge, MA: Harvard University Press. Becker, Gary S. and Nigel Tomes (1986), ‘Human capital and the rise and fall of families’, Journal of Labor Economics, 4 (3, pt. 2), 1-39.

Brittain, John A. (1978), Inheritance and the Inequality of Material Wealth, Washington, DC: Brookings Institution.

Ebeling, Richard M. (ed.) (1995), ‘American perestroika: the demise of the welfare state’, Ludwig von Mises Lecture Series, no. 23, Hillsdale, MI: Hillsdale College Press.

Eucken, Walter (1952), Grundsatze der Wirtschaftpolitik [Principles of Economic Policy], Tubingen: J.C.B. Mohr.

Meade, James E. (1973), The Inheritance of Inequalities: Some Biological, Demographic, Social and Economic Factors, London: Oxford University Press.

Plato (1892), The Republic, ed. and trans. by B. Jowett, London: Macmillan.

Rignano, Eugenio (1924), The Social Significance of the Inheritance Tax, trans. by William Shultz, New York: Knopf.

Tullock, Gordon (1971), ‘Inheritance justified’, Journal of Law and Economics, 14, 465-74.

Wagner, Richard E. (1977), Inheritance and the State, Washington, DC: American Enterprise Institute.

Wagner, Richard E. (1993), Federal Transfer Taixation: A Study in Social Cost, Washington, DC: Institute for Research in the Economics of Taxation.

Wedgewood, Josiah (1929), The Economics of Inheritance, London: George Routledge & Sons.

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