Thomas Piketty argues in his recent bestseller, Capital in the Twenty-First Century, that capitalism has a natural tendency towards ever increasing concentration of wealth, and that inheritances play a major role in perpetuating and increasing inequality. While wealth inequality is much lower than in the late Victorian “Gilded Age”, we are headed in the wrong direction.
Socialists have long argued that the highly unequal ownership of wealth reflects the power of the rich in the market and in politics, and that governments should seek to equalize wealth through taxation and other means in order to promote social justice and greater equality.
But inheritances and other large transfers of wealth between generations are problematic even for the most pro capitalist thinkers, since they clearly reflect the luck of birth as opposed to justifiable rewards for productive contributions to society or to effort. Large inheritances undermine real equality of opportunity for individuals in the market, since some start well ahead of others in terms of the ownership of capital and access to higher education and other opportunities.
Even Friedrich Hayek, the spiritual founder of today's radical free market economics, wrote in his seminal work The Road to Serfdom that “(i)n a system of free enterprise, chances are not equal since such a system is necessarily based on private property and (though perhaps not with the same necessity) on inheritance, with the differences of opportunity which these create.”
John Stuart Mill famously argued in his Principles of Political Economy that a large graduated inheritance tax should be levied to ensure that private property did not become too concentrated in a few hands, and in order to prevent economic advantage from being inherited. Taxes on large wealth transfers between generations have long been a feature of most tax systems in advanced industrial countries, though not in Canada since the abolition of the federal estate tax in 1971.
Piketty and leading British inequality expert Tony Atkinson note that taxes on wealth, especially on inherited wealth, have become less onerous over time, and argue that they should be increased as part of a serious re-distribution agenda.
Wealth in Canada is highly concentrated in a relatively few hands. Taking into account the fact that sample surveys tend to miss the very small number of persons who are multimillionaires and billionaires, economist Lars Osberg has estimated that the richest 1% of Canadians hold about one fifth of all net wealth (assets minus liabilities.)
The most recent Statistics Canada data, for 2012, show that the top 10% of Canadians own half (47.9%) of all net wealth (and an even larger 60% of all financial assets) while the bottom 50% own less than 6% of net wealth because debts are high compared to assets.
While data are limited, inheritances seem to play a role in the accumulation of wealth at the top. The Survey of Financial Security for 2012 shows that 27% of Canadian families have received an inheritance, rising to over 40% of those aged 55 and over. The average value of an inheritance was quite significant, $107,700, but the median (half received more and half received less) was much lower at $32,200.
Analysis by the Quebec Statistical Institute shows that, in that province, the average inheritance received by a person in the top 20% of income earners in 2012 was $312,400, about one hundred times as much for those in the bottom 20% ($3,200) and more than ten times as much as those in the middle 20% ($26,200.) Inheritances are quite heavily concentrated among the most affluent families and thus compound income and wealth inequality over time.
Inheritances continue to play a significant role in the accumulation of wealth in the hands of the richest Canadians. Forbes Magazine rankings of billionaires show that the ten richest Canadian families include at least four heads of families whose fortunes were at least partly inherited: those of David Thomson, James and Arthur Irving, and Galen Weston.
Wealth, especially financial wealth, is highly concentrated in Canada and produces a significant source of income and economic well-being for the rich which is not earned in the same sense as income from wages and salaries. At a minimum, inequality of financial wealth greatly reinforces inequality of income.
This is hard to justify on the normative grounds used by liberals to justify economic inequality, namely that individual rewards reflect the productive contributions of individuals. Accordingly, it is not “unfair” to consider taxation of inheritances and large accumulations of wealth.
Andrew Jackson is Adjunct Research Professor in the Institute of Political Economy at Carleton University and senior policy advisor to the Broadbent Institute
Photo: Quinn Dombrowski. Used under a Creative Commons license.