The (Capitalist) case for 100% Inheritance tax
Time to end inherited privilege
In my last post I made the case for defending billionaires. But it’s important to note that I don’t believe that all billionaires are created equal. The type I defend, the type I think are worthy of defending are the entrepreneurial billionaire class. Those that take risk, build companies, provide jobs and are thus duly rewarded.
These companies move technology forward, serve customers, help grow the economy, are positive sum and employ thousands of people in well paid jobs. If that founder becomes a billionaire, bully for them.
What that article is not, very obviously, is a defence of all rich people - as I said, not all billionaires are created equal. I think that founders should be able to get as rich as Croesus - they took the risk, the built the company, they dealt with the sleepless nights and the psychological terror. Without them, it wouldn’t exist.
However, when they step aside, or die, I think there should be some limit on how much the professional managers that replace them should be able to make. I don’t, for example, believe that Tim Cook should be able to become a billionaire.
Tim is obviously an incredibly capable operations man but he joined Apple in 1998, 22 years after they were founded. He joined an established company and took very little risk. Steve Jobs had already returned. And yet he was amply rewarded to the tune of around $2.5bn. That is a crazy reward for a capable corporate climber.
The question of how to limit these earnings we will leave to another day.
Capitalism works best when one person or a group of people are able to take a risk to start a new venture and, if it’s successful, they are rewarded with an unlimited upside. Employees, professional managers and those taking minimal risk should have limited upside. High, sure, but not unlimited.
And if I feel that way about managers/employees in top private companies, imagine how I feel about those that inherit their wealth.
We all accept a level of genetic inequality inbuilt into humanity. Some people are born smarter, better looking or are better athletes. I could train til the end of time but I’d never be able to run as fast as Usain Bolt, nor will I ever be as good looking as Brad Pitt (regardless of what my mum says).
The idea of a level playing field is a lie.
Whilst society can’t step in and level the genetic playing field, it can in the financial one. And I think that it should. Those from better off households already have an advantage early in life. They are likelier to live in 2 parent households, attend better schools, go on foreign holidays, participate more in extra curricular activities etc etc.
If, after receiving this early advantage, people are still on par with those who didn’t get it, then why should we give them an additional step up by allowing them to inherit vast sums of money based purely on luck of birth.
Imagine two people, Peter and Paul, who both are the same age, working the same job, just as hard as one another, earning the same amount. Except Peter’s parents die leaving him an estate of around £1m and Paul’s die leaving him nothing but the sadness. Well Peter can now upgrade his house, maybe send his kids to private school and go on nicer holidays than his colleague. Not because he worked harder and got promoted, but purely by dint of luck. And coming from a richer background, he probably grew up with more advantages than Paul so it’s down to Paul’s hard work and determination that they were ever on a level playing field to begin with. The inheritance here is just cementing the inequality.
And that example is a relatively small inheritance. At the really top end, it’s even crazier. John Rockefeller died in 1937 at the age of 97. He currently has around 300 descendants living off the fortune he created. And they are living large - some Rockefellers are still worth hundreds of millions whilst others are worth just tens of millions. For nothing! They did nothing!!
Looking at the British aristocracy makes it even worse. Take the Duke of Westminster for example. A nice chap supposedly, once described as Britain’s most eligible bachelor, worth around £10bn because in 1677, his ancestor married into a family and thus inherited some prime central London real estate. That property remains in the family and making the current Duke outrageously rich through zero ingenuity or hard work of his own 350 years later. Literal insanity! The idea of embedding this inequality through multiple generations is grotesque and it should sicken any true capitalist.
The proliferation of family offices is another sign of this sickness. These institutions that manage vast wealth in tax efficent ways for families who did nothing to earn it is an indictment of the entire system of capitalist wealth creation. Look at the insane growth of family offices since the financial crisis.
Family offices exist for one purpose: preserving dynastic wealth. Their entire business model is ensuring fortunes remain inside bloodlines indefinitely. That seems almost the opposite of capitalism, where wealth is supposed to be continually earned through competition.
Now I know what you’re gonna say: “This sounds pretty socialist for an avowed capitalist” and you’re right. But I believe in meritocracy. Vast inheritances tip the balance away from that. They entrench unearned advantage that breaks societal balances. And the more inheritances there are, the more unbalanced the whole society becomes.
And I know you’re going to come at me with a couple of counter arguments:
I’ve earned this money, I should choose who it goes to when I’m gone. To which I say pah! You are correct, you did earn this money. Whilst you’re alive you can spend it on whatever you want. One of the definitions of being dead is that you can no longer care about anything, least of all, where your money goes.
The government is terrible with money, they don’t deserve any more of mine. To which I’d say; “I wholeheartedly agree” but really it’s your own fault if you left any money for them to take.
Which takes me onto 2nd order effects. If a government actually instituted a 100% inheritance tax the cohort of people who’d actually end up paying would be tiny. They’d be the accidental payers. What would actually end up happening is this:
Rather than hoarding their money, Boomers, Gen Xers etc would spend the money now on their family. And why wouldn’t they do that anyway - you know what you can’t see when you’re dead? The smiling faces of your family. So spend the money now. Help them with homes and schools.
The economy would boom from that money flowing into into consumption, property etc.
Companies would spring up that would help you make your assets liquid so you could spend the money whilst you’re alive. The assets (houses etc) would pass to them upon death
So you can go from the asset heavy life of the late Boomer into asset light, cash rich, watch the joy on your family’s face as you spend it on them rather than wait til you’re dead. Then, at death, the company takes ownership, speeding up probate process which currently can take up to 12 months, thereby adding liquidity straight back into the housing market. Feels like a win-win.
So, inheritance is bad - the kids of Sam Walton, founder of Walmart, should not be able to buy NFL teams. Spend your money whilst you’re alive. Spend it on anything you like but if you’re dumb enough to leave any left over, then yes, the government should get it all. At least we wouldn’t end up with the absurdities of a Duke inheriting £10bn worth of prime London real estate because his ancestor married well over 3 centuries ago.