The Inheritance of Wealth: Justice, equality, and the right to bequeath
by Daniel Halliday
(Oxford University Press, 2018)
In his prose memoir, "91 Revere Street", Robert Lowell imagines the portrait of his great-great-grandfather saying, "My children, my blood, accept graciously the loot of your inheritance. We are all dealers in used furniture". Differences in the quantity and quality of "the furniture" we inherit are likely to have a material, unearned impact on our lives, leading some philosophers to argue that the state has just cause to restrict the circulation of such "loot".
Daniel Halliday argues that for reasons of social justice, wealth should not be allowed to pass freely down the generations, but should be taxed progressively over time. By this he means that wealth could be bequeathed once, at a modest level of taxation and with appropriate threshold exemptions, but for a second and third time only at punitive levels of taxation, to prevent the accumulation of large pools of inherited wealth within a small number of families.
There are three steps to his argument: first, to describe what the social injustice is; second, to demonstrate that the passage of wealth down the generations perpetuates this injustice; third, to set out how an inheritance tax could function as a partial remedy. The argument is developed clearly, through engagement both with traditional liberal arguments about property rights and inheritance and with contemporary work in philosophy and economics concerned with inequality and the tax system.
Halliday thinks it unjust that certain groups of people have access to privileges – opportunities and social standing – unavailable to other groups. He combines two familiar concerns: first, that many of the facts that determine the outcome of a person's life are the result of circumstance rather than choice; and second, that many of these differences in outcome are strongly influenced by our membership of groups. It is unfair, he argues, that a person's life chances should be largely set at birth, by the brute fact of being born into a family which belongs to a particular economic and social class. Moreover, because members of economic groups tend neither to mix much with people outside their group, nor to find it easy to move out of the group into which they were born, our society risks becoming segregated, with those in groups that enjoy wealth and privilege looking down disparagingly on those who are less fortunate. The lucky few are tempted to believe that their success is merited and that the less successful lives of others are the consequence of poor choices, not unfortunate circumstances.
For Halliday, social segregation is partly grounded on the possession of financial capital, but is reinforced by non-financial capital. Social capital (knowledge and opportunities) and cultural capital (behavioural norms and dispositions) are acquired during childhood and adolescence. The greater ability of wealthy parents to invest in their children's non-financial capital helps ensure their continuing membership of elite social groups and, consequently, their privileged access to positional goods (those commodities whose supply is limited and whose value is set by their relative superiority, such as a front-row seat in the dress circle at the opera).
The next step in his argument is to show that inherited wealth plays some causal role in the reproduction of these unjust features of social life. At conception, we acquire a blend of our parents' DNA. Later, during childhood, our parents shape the formation of our minds and characters, through a wide range of words, behaviours, actions and, in some cases, neglect. At death, they might (or might not) bequeath us a house, assets, savings and an assortment of reliquaries. It is not obvious that the posthumous gift of wealth is the most important of these parental donations.
Halliday makes clear that while wealth transfers might not be the most efficacious mechanism for the intergenerational replication of inequality, they are the mechanism most amenable to intervention, since a tax on the inheritance of assets could be more easily justified in moral terms than state intrusion into other aspects of family life. Moreover, he recognizes the value of modest wealth transfers in promoting upward social mobility and is therefore concerned to protect the positive benefits of bequests while limiting the long-term damage of great wealth descending down the family trees.
One important question for Halliday here concerns the extent to which access to financial capital determines access to the non-financial capital that helps structure social segregation. Halliday notes that "parents may well be equally motivated when it comes to the pursuit of actions that confer advantage on their children, but parents who inherit (or expect to inherit) are much better placed to enact such strategies, especially during the earlier years of their child's life". In addition, having rich parents is a signal that allows their children to access many of the privileges accorded to members of elite social groups.
The cumulative benefit of repeatedly inherited wealth is not just the aggregation of ever larger sums with which to purchase non- financial capital, but also the opportunity to embed the status associated with social segregation over several generations. In contemporary society, inheritors tend to be mature adults who are already established in life when their parents die. However, because they can anticipate a future injection of capital, they can afford to invest more in their children and to adjust their spending and saving during their working lives, in ways not possible for those who have no expectation of a large legacy.
At the third step of his argument, Halliday proposes an inheritance tax system that allows for one modest transfer of wealth, from those who earned it to their direct descendants, but sets confiscatory levels of tax for wealth that is passed for a second or third time. This idea of progressivity through time draws on the work of the Italian economist, Eugenio Rignano (1870–1930), who wanted to protect the incentives for economic production that inheritance creates – that is, we work harder and save more if we think we can pass something to our children – but also wanted to avoid the pernicious social consequences of persistent inequality, which result from concentrated flows of wealth over many generations.
A Rignano-type tax on inheritance would resemble our current approach to copyright, which permits the financial benefits of intellectual property to accrue to their creators (and inheritors) for a fixed term only. Halliday believes that this approach would preserve our ability to pass modest wealth to our children but would bring an end to dynastic wealth. It would reduce the injustice that luck of birth is a material determinant of quality of life, while avoiding excessive state intervention in the conduct of family life.
Serendipitously, the UK Office for Tax Simplification has recently launched an inquiry into the current state of the inheritance tax system, which, despite raising less than 1 per cent of total tax revenues, is widely criticized for being overly complex. Although the OTS review is focused on technical and administrative features, Daniel Halliday's book would be a fine source for the principles by which to judge the effectiveness of the current system. There are nonetheless caveats.
First, I am not convinced by Halliday's claim that "the distribution of non-financial capital is subject to the strong prior influence of the distribution of financial capital such as wealth and property". For example, elite universities or blue-chip companies could make sufficient effort to offer equal access to candidates from the whole range of social groups reducing unfair advantages for the children of the rich. Those areas of social life where performance is public, objective and important are the most meritocratic. In sports, parents can be significant influencers, not because of their wealth but because they teach their children resilience and discipline. Most successful sports people do not start out rich.
One of the best ways to lower the importance of wealth in society is to reduce its signal effect. Rather than using the levers of distributive justice, such as the tax system, to effect improvements in social equality, we might do better to promote social equality directly. The opening up of access for women to higher education, the professions and (more recently) to boardrooms shows that beneficial social change is possible when tenacious actions are taken to achieve it.
Second, while Halliday acknowledges long-standing liberal concerns regarding the impact of greater state involvement in social life, he says little about the role of the state itself in promoting segregation. I am thinking here not only about the tendency of interventionist states to become plutocratic, but also about ways in which democratic governments have used tax and social policy to promote segregation. Racial segregation in the US housing market did not happen wholly by accident. As Richard Rothstein describes (The Color of Law, 2017), the 1949 Housing Act provided federal subsidies for house building in the suburbs, to relieve pressure on run-down urban areas. The Federal Housing Administration restricted access to these new homes to whites, in some cases inserting clauses in the deeds to prevent their re-sale to African Americans.
The challenge for anyone advocating increases in specific taxes to achieve worthy social goals, is to provide credible evidence that these increases will achieve the desired goals, rather than simply raising overall tax revenues. Highly indebted states have an interest in increasing the amount of tax raised, irrespective of the social consequences.
Third, Halliday recognizes that higher inheritance taxes would provoke tax avoidance behaviour, such as an increase in gifts to children during the lifetime of the parent rather than at their death. This, he thinks, could be thwarted by a gift tax on receivers, but I suspect this might stimulate further avoidance activity, with rich parents setting up companies through which to direct money to their children as employment income or dividends. In addition, it is not obvious why we should want to use taxation to penalize gift-giving more generally: do we include the beneficiaries of organ donation?
A better approach might be to endorse Andrew Carnegie's dictum that to die rich is to die disgraced, and to encourage the rich (and the not so rich, for that matter) to give away most of their wealth during their lifetimes, either to their children or to philanthropic causes. A tax system that incentivized inter vivos giving might not achieve the end of social segregation, but it would encourage the passing of wealth to the younger generation when they most need it. It would also lessen the power of the aged over the prospective beneficiaries of their estates, which would be no bad thing.
Daniel Halliday has made a cogent argument for a more concerted effort to reduce social segregation and its malign effects. Better designed inheritance tax rules would certainly comprise one element of this project. And we should find better ways to signal to the rich that their social segregation on grounds of wealth is a stigma and not an honour.