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Blog: Everyone an Inheritor?

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  • Economics and Finance
  • Enterprise
  • Global
  • Social justice

In my latest blog on policy approaches to spreading capital, I discuss the idea of unconditional ‘capital grants’ - lump sums of money given to all in recognition of their common status as citizens.

You can read the previous posts in the series here and here, while Benedict Dellot's blog does a great job in explaining why capital is so important. 

This idea is distinct from the more well-known proposal for a basic income; the latter is a regular payment that supplements an individual’s earned income rather than a one-time boost to their wealth/savings. And as a one-time payment, an unconditional capital grant would necessarily be much larger in size than a basic income.

This in turn reveals the different intentions behind the provision of capital rather than income: instead of topping up consumption, a publicly provided capital grant would exist so that all of society could reap the benefits of access to wealth (clearly not the case currently). These benefits include the ability to cover (without taking on debt) large irregular expenditures such as starting up a business or other personal venture, paying for education and/or skills training, forgoing work temporarily to rest/pursue hobbies, and last but not least investing wealth to generate returns.

Specific proposals that have been put forward for universal capital grants illustrate the importance of the scale factor: on the lower end Julian Le Grand suggests the figure of £10,000 per person, Thad Williamson recommends $50,000, while Ackerman and Alstott go for the considerable sum of $80,000. That last figure comes from the costs of covering an American university education, which have only grown since then. Again, the emphasis is on providing sums of money large enough to provide financial security, cover substantial life expenses and generate meaningful returns on investment (which might well vary by country).

The UK’s Child Trust Funds were a modest attempt to make every citizen an asset-holder – the government provided an initial sum which could be topped up by friends and relatives – but the voucher value of £250 looks insignificant next to the more ambitious proposals above.

Apart from Le Grand’s proposal, these sums are far greater than the annual basic incomes of a few thousand pounds supported by the UK Green Party and by campaigning organisations such as Citizen’s Income Trust and Basic Income UK. Universal capital grants are not the same thing as a basic income, and would not negate the need for the latter. A basic income would be financed largely by existing taxes on income – justified because it addresses income inequality and because it would replace many of the benefits currently funded by income taxes. A citizen’s grant on the other hand would address wealth inequality (currently more skewed than its income counterpart) and would therefore most logically be funded by taxes on wealth.

Our upcoming Power to Create report on capital ownership will recommend shifting the burden of taxation from income to wealth – and an obvious source of financing would be the taxation of inheritance. From a philosophical perspective, this intuitively makes sense as the universal capital grant is best understood as a national inheritance bequeathed to every citizen. Although one might plausibly argue that a person is entitled to the wealth that they have accumulated over a lifetime, this entitlement becomes far more questionable when it is being passed down to friends or family members who played little to no role in producing it. More radically, one could question the role of personal effort itself in the accumulation of riches, when much of it is the result of natural gifts, societal institutions and norms, past technological progress, and the achievements of previous generations (and indeed the accumulated inheritances passed down through history, frequently untaxed).

In his article for Politics Inspires, political theorist Stuart White lists just a few of the reasons why a society that offered an inheritance tax funded citizen’s inheritance would be ethically fairer and freer than one where inheritance remained a purely private affair. Similar to the above arguments about the dubiousness of inheritance claims, White makes the simple point that in a world of universal capital grants, everyone would be guaranteed an inheritance regardless of the economic circumstances they were arbitrarily born into. Furthermore, each citizen would receive their grant at a predictable time and be able to plan for its usage, unlike their private counterparts which are dependent on the unpredictability of death and generally received later in life.

The majority of proposals for capital grant schemes (including the three cited) opt for early adulthood (18 or 21) as the time of receipt, as this is when the money is most likely to be effective in unlocking opportunities and improving future outcomes. A private inheritance received in middle age (or even later, given current life expectancy trends) is unlikely to have the same impact, once major decisions on education and occupation have already been made.

A common response to this is that if the option of passing on wealth to close relations is taken away, people will simply work less and provide the state with less revenues in the long run. While this argument holds some water, the choice to be made is not one between a society that leaves inheritances untouched and one that confiscates them entirely to fund a citizen’s grant.

As White explains, it is entirely reasonable to imagine a system somewhere in the middle that finances capital grants but also respects the motivational importance of private altruism. Le Grand’s £10,000 grant proposal (made in 2000 it should be noted) claimed that a 25% tax on wealth transferred via inheritances and lifetime gifts would suffice to cover every citizen. But that figure seems low in light of the powerful moral arguments against inherited wealth, so higher rates (and by extension larger grants) should not be ruled out. More fundamentally, one should question whether current norms regarding distributional fairness should be our guide to future policy: after all, income taxes in the double digits were considered unacceptable in the 19th and early 20th centuries.

Wealth taxes on assets above a particular threshold would be another way of funding the grants. They are the policy of choice for Ackerman and Alstott, who argue that ‘an annual wealth tax of 2% should suffice to fund stakeholding completely’. While the countries that have introduced wealth taxes are few and far between (France and Norway being exceptions), proposals to do so are increasingly common, such as the Labour Party’s ‘mansion tax’ and the Green Party’s levy on assets above £3 million. Ethically speaking the arguments in favour are similar to those made for taxing inheritance: while the income saved in accumulating wealth is (partly) the result of individual effort, this is far less true of the returns generated on that wealth via financial, land and property speculation.

Another objection to the grants, that nothing would prevent people blowing their capital on luxuries rather than necessities, is the flip side of what is actually a major strength of the policy. Unlike many other forms of public welfare, which are determined from above and restrictive regarding usage, capital grants (and by extension the basic income) respect each person’s right to individual self-determination, including the right to make mistakes. This makes them wholly compatible with libertarian values. They also make sense from a market-based perspective, since recipients rather than the state make decisions as to where their capital would be most efficiently allocated. While some laissez faire-ists might protest that freedom is compromised by the wealth taxes needed to fund the grants, this is surely outweighed by the boost to aggregate freedom that endowing every citizen with capital would produce.

As things stand, the policy is a far flung dream. The current inheritance tax regime is so riddled with loopholes and exemptions (around 88) that fewer than half the richest people who die in a given tax year will pay anything. While those leaving behind more than £325,000 are supposed to hand over 40% to the government, in 2012 only £3 billion was paid on the £60 billion bequeathed (you do the maths). In the 1930s around 30% of deaths resulted in death duties; this has fallen to just 3% today.

The tax regime needed to fund a moderate citizen’s grant would have to apply to more people, and offer fewer exemptions. This is precisely the opposite of what the new government’s election manifesto proposes, with changes due to be implemented that even the Treasury conceded will ‘most likely benefit high income and wealthier households.’ Ditto for any prospect of a substantial wealth tax in the foreseeable future.

The Child Trust Funds were abolished by the Coalition government in 2011, despite their success in boosting saving rates amongst the poor. The new Conservative majority government is unlikely to introduce anything similar soon – but comparable policies may begin to gain traction in other countries as global inequality continues to deepen.  

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  • From where I'm looking - as someone who has no real expectation of any meaningful inheritance - this seems slightly perverse.

    Take, if you will, an example of someone who has worked hard, perhaps building up a successful small business from scratch, bringing employment to local people with all the benefits of wealth remaining in the local community. Over time, the children have grown up and joined the family firm and continued the good work.

    Now take the situation that upon death, 25% of the value of the company has to be realised some way or another in order to pass to those who played no part in its success; gave no succour to the entrepreneur who put in the hours of blood sweat & toil to build something that he could be proud of and which would support him & his family in later life. 

    This suggestion could destroy their business and their livelihoods.

    There are reasons that exemptions such as those for small / family businesses exist.

    Another example: Someone lives with their ageing parent and is the main carer. Eventually, the decision is made that the parent needs to enter residential care and the child sells the family home and uses part of the proceeds to purchase an immediate care annuity that secures the payment of the care fees for the parent's lifetime.  The remaining funds are used to purchase a property for the child to live in. Upon the parent's eventual demise, the carer could find him/herself homeless as a large capital sum will need to be paid as Le Grand suggests a lifetime allowance of only £50,000.

    There is a reason that the nil-rate band exists at the level it does.

    And if one starts to accept that there some worthy exemptions, then the universality of the application of the tax fails.

    If it is seen as desirable that IHT is used to raise finance for such reasons as laid out, then I would suggest that the key to success might lie in introducing more graduated bands, replacing the 0% on £325,000 and 40% thereafter with a series of smaller, incremental amounts at different levels. This would also have the advantage of not requiring any changes to Primary legislation.

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  • Blog: Everyone an Inheritor?

    Maximilian Yoshioka

    In my latest blog on policy approaches to spreading capital, I discuss the idea of unconditional ‘capital grants’ - in other words lump sums of money given to all in recognition of their common status as citizens.