A citizens tax on inheritance would spread wealth, freedom and opportunity

by Stuart White

The debate over inequality is often framed in terms of the distribution of income. But it is also important to focus on wealth: the stocks of assets which individuals have as distinct from the flows of income they receive.

Wealth matters because of its links to two core social democratic values: freedom and equality of opportunity. Wealth is a platform for personal independence. One can more readily walk away from abusive employers or spouses because one has some resources of one’s own to draw on. Wealth underpins a creative approach to life.

Someone with wealth can realistically step back and ask themselves what they want to do with their lives. Connected with this, wealth confers opportunity: to get an education or training, to set up a business, to move, to travel, to experiment, to recharge one’s batteries. A degree of wealth equality is therefore indispensable to equality of opportunity. It is particularly important to hold wealth when young when so many important life-shaping decisions are made.

Given that wealth matters, the statistics on wealth distribution are alarming. As of 2003, the wealthiest 1% owned 21% of marketable wealth in the UK, while the least wealthy 50% owned 7%. A large proportion of UK families - 35% in 2008 – lack any savings at all. And wealth inequality has been rising steadily. Using the Gini coefficient measure of inequality (where a figure closer to 1 indicates more inequality), the relevant figures are 0.644 for the period 1982-86; 0.664 for the period 1992-96; and 0.690 for 2002-3.

So what do we do?

One idea which has surfaced again and again since the rise of industrial capitalism is that of a citizen inheritance: the proposal to endow all citizens with a decent grant of capital on maturity as of right. The idea can be traced back at least as far as Tom Paine.

‘When a young couple begin the world,’ he wrote in 1797, ‘the difference is exceedingly great whether they begin the world with nothing or with fifteen pounds apiece. With this aid they could buy a cow, and implements to cultivate a few acres of land; and instead of becoming burdens upon society...would be put in the way of becoming useful and profitable citizens.’

Labour has taken a first crucial step towards a citizen inheritance by introducing the Child Trust Fund (CTF). The state gives all citizens a small sum at birth (and a further sum in childhood) which is invested and accumulates as they grow up. Families can contribute into the fund up to an annual ceiling. Labour has also introduced the Saving Gateway. This provides matching subsidies to poor households who save into special accounts (the government will put 50p into the account for every £1 saved by the household).

First and foremost, it is important to defend these policies. The Liberal Democrats, oblivious to their own philosophical tradition of seeking ‘ownership for all’, continue to disparage the CTF, and it is unclear how deep is the Conservative commitment to these policies.

However, if we wish to rise to the challenge posed by high and rising wealth inequality, then these policies need to be developed, not just defended. The government’s decision to allow families to contribute to CTFs means that the amount children receive on maturity will depend on household resources, compromising the policy’s impact on equality of opportunity.

To correct this, government must help low-income households save more into their children’s accounts. Extending the Saving Gateway approach, the state should match the savings of low-income households into their children’s accounts, and at a generous rate.

In a period of fiscal austerity, however, how are to get the resources for this? Again, Paine might offer some answers. Paine saw the universal capital grant as one side of a new system of social inheritance: wealth at death would be taxed and the funds used to finance the system of capital grants for all.

One way to think about the principle at stake here is to do a thought experiment. Imagine two extreme systems of inheritance. Under the first system, which we may call the fully private system, all wealth passes to individuals through family and friends. Under the second, which we may call the fully collective system, all wealth transfers are taken by the state and distributed back to citizens on a completely equal basis.

Now, what do we think of the two systems? So far as I can see, both systems have clear advantages and disadvantages. On the one hand, the fully private system respects the ‘family values’ that many people see as having a legitimate and important place in the way society organises inheritance. But under this system inheritances are likely to be very unequal; unpredictable as to timing; and, potentially, individuals may find themselves in the grip of relatives who deploy prospective inheritances manipulatively to control their behaviour.

The fully collective system is able to do away with all of these problems. The taxed wealth transfers can be distributed on a fully egalitarian basis; they can be distributed at a predictable point (or points) in the life-cycle so people know when they will be getting an inheritance and can plan around this; and, so far as inheritances are concerned, people would be outside of the grip of potentially manipulative relatives. On the other hand, the fully collective system obviously gives no place at all to the ‘family values’ which many people see as legitimate and important in this context.

Intuitively, then, a morally attractive system almost certainly lies somewhere between the two extremes. But where exactly?

As things stand, we are in the UK very close to the pure familial model of inheritance: only something like 7% of wealth transferred at death is taxed, meaning that some 93% goes via the familial route (and this is to ignore wealth transfers prior to death which do not count as part of a taxable estate). I cannot see why it would be wrong in principle to get that 7% figure up to, say, 15% or even 25%.

That still leaves the vast bulk of wealth being transferred via the family, so that those who are concerned to ensure that our inheritance system respects ‘family values’ would surely have little to complain about. On the other hand, the extra revenue we get from doubling or tripling inheritance tax would help enormously to fund other policies, like the Saving Gateway and a matched savings scheme in the Child Trust Fund.

Of course, it is an understatement to say that inheritance tax is unpopular. But it is important for social democrats to understand what their own principles imply. Our principles imply much heavier taxation of inherited wealth – which we can then link to initiatives to widen asset ownership.

In view of this, we should not simply capitulate to public opinion, but make the case for what we think is right. One thing is for sure: until we start doing so, wealth inequality is going to go on rising and our warm words about ‘opportunity’ and ‘fairness’ will become even more divorced from the reality of British society than they are now.

Stuart White also has an ideological map of modern progressivism in this week's New Statesman which is well worth a read.