Inheritance and Meritocracy

I have been reading Kaushik Basu’s Beyond the Invisible Hand: Groundwork for a New Economics lately.  Basu proposes that the world would be much better off with a much bigger inheritance tax because it would reduce persistent inequality.  It won’t solve the problems of poverty and inequality, but it would help.  Basu, who is originally from India, says it would reduce the de facto caste system that is present everywhere.  It is remarkable how the inheritance tax has declined during the same period that inequality has risen.

According to the New York Times, “Michael D. Hurd and James P. Smith of the RAND Corporation estimated that half of the children of parents born from 1931 to 1947 — that is, parents who are about 60 to 75 years old — would inherit less than $19,000, while the top 5 percent would receive at least $237,000.”  According to the Center on Budget and Policy Priorities (CBPP), “today, 99.86 percent of estates owe no estate tax.”  And because much of large estates is composed of long-term capital gains, a lot of wealth is evading any sort of taxation at all.   The CBPP explains many myths about the estate tax, but one reason that it is unpopular with regular folk is that they see it as a “death tax” rather than an estate tax.  Nobody wants to tax death, but wealthy estates are another matter.  Republican pollster Frank Luntz said that the term “death tax” “kindled voter resentment in a way that ‘inheritance tax’ and ‘estate tax’ do not”.  “Death tax” is a misnomer because there is almost zero correlation between death and the estate tax.  Only 1 in 714 deaths is currently correlated with the estate tax.   Extremely large estates are correlated with the estate tax, so perhaps a better name for it would be the large estate tax.

There are many arguments in favor of the estate tax, but one that relates to my recent posts is that the estate tax should encourage more investment in meritocracy and less expenditures on lavish consumption for heirs.  Currently, there is little point in investing in the human capital of heirs like Paris Hilton* who will never need to work and indeed, she did not graduate from high school.  But with a bigger inheritance tax, it becomes more imperative to invest in children to help them to enjoy future wealth and status rather than just giving them money.  Because wealthy elites have disproportionate ability to set social norms, if the scions of the wealthiest elites spent more time working and less time partying, some of that ethos is likely to trickle down to the frat pack of the merely well-off.

*An odd backstory about the inheritance within the Hilton family is that Paris’ great-grandfather, Conrad Hilton, had planned to leave 97% of his estate to charity, but his son Barron contested the will and got much of the fortune.  Thirty years later, around the time when Barron said he was embarrassed by Paris’ behavior, Barron said he would give 97% of his estate to charity, but we will see if Paris’ father follows family tradition and contests it when the time comes.  A higher estate tax would encourage even more charitable donations and make it less lucrative for heirs to subvert the will of the deceased.

UPDATE:  See “Death Tax” worse than an “Estate Tax”