The value of inheritances

Megan McArdle talks through issues of inheritance in the United States:

I don’t see by what right people should be allowed to order living people how to dispose of their stuff after they’re beyond caring.  I think people should be allowed to make generous gifts while they’re still alive, without gift tax. (Though I think the recipients of those gifts should have to pay income tax on it; I don’t understand why we’d want to tax income people get by working, but not income people get by being born.  Being born is about the most tax-inelastic thing you can think of.)  But once people are dead, then I can make a pretty compelling case that in a modern economy where extended families are not a major economic unit, there’s little justice case for inheritance…

Inheritance not only hands people valuable income in return for something we don’t really want to further reward–being born lucky–but also, in doing so, it entrenches the least attractive feature of our economy: the fact that people who are born to affluent parents are much more likely to themselves be affluent than children born to the less well-heeled.  Lack of economic mobility is generally regarded as a bad thing that we should combat.
Yet so many of our institutions, from the geographic organization of our schools, to the financial distribution of our inheritances, reinforce it.  Some of those things are not going away (we should not, and will not, order affluent people to move into poor school districts, or shut down research universities for conferring unfair advantages on the mostly affluent students who have the ability to gain admission).  But what are the social benefits that inheritance conveys to offset its drawbacks?  I think they have to be pretty large to justify letting dead people order us to perpetuate the economic status quo.

So I can make a moral case for a 100% estate tax.

McArdle then goes on to talk through specific situations where inheritances might make sense and suggests in the end that she is wary of putting this into practice because it is unclear how it would turn out.

I think her earlier points are of more interest as Americans talk about meritocracy but inheritances seem to go against this ideal. From the beginning, Americans have had the populist idea that class doesn’t matter in the same way that it did in England. We argue that there should be mobility between classes (presumably this also means people can go down), not more rigid classes where money is passed down for decades. But we have a less flexible system than we imagine – some people can move up but the numbers are relatively low. This is exacerbated when we look at disparities in wealth between different groups: wealth is not then just about passing along hard-earned benefits to future generations but rather about reinforcing the large existing wealth inequalities that hamper American society.

I would be interested in seeing more data regarding what Americans mean when they say they want their children to have a better life: does this come from actions during their lifetime, like by promoting education or particular values like hard work, or from an inheritance that is passed along in a will?

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