Nova workboard

a blog from young economists at Nova SBE

The role of inheritance in wealth inequality

A central fact of social life is that when someone dies, any assets they have managed to accumulate during their lifetime is left behind. Social rules dictate that the property of the deceased rightfully belongs to the family members, which creates an enormous bias of economic distribution towards those born into wealthy families. Strictly based on fortuitous genetics, offspring of well-off families inherit money and assets, as well as traits that influence their ability to further accumulate wealth (like orientation towards the future, work ethic, school attainment, etc.). Recent evidence on the intergenerational correlation of incomes suggests that parental income and wealth are strong predictors of the likely economic status of the next generation: a son born in the top decile has a 22,9% chance of attaining the top decile, whereas a son of the poorest decile’s chance of attaining the top decile is only 1,3%. There is more evidence that validates the concept of inheritance privilege, like the fact that those who receive an inheritance are more likely to own a home than those who do not (regardless of the size of the inheritance) (Flippem, 2001).

Although inheritances per se are not a primary cause of inequality, they perpetuate a gap in opportunities that is reflected in today’s unequal distribution of wealth – the richest 1% have more wealth that the rest of the world combined, according to Oxfam. The prevalent meritocratic rhetoric idolises the “self-made” man (particularly in the USA, where the people actually elected one for office). Although these magnates are perceived by many as the epitome of meritocracy, a recent study shows that that often isn’t the case. The study estimated that more than 20% of the moguls in the Forbes 400 list had inherited sufficient wealth to make the list without accounting for their current businesses, and almost all had inherited businesses or large amounts of money and assets, with only 30% coming from a lower or middle-class background. This unequal distribution of opportunities allows the heirs of unearned streams of income to collect returns and further accumulate wealth, widening the inheritance disparity.

Thomas Piketty has thoroughly studied the dynamics of wealth and income inequality in the last couple of centuries, often illustrating his ideas with examples from XIX century literature. Balzac’s and Austen’s novels had many things in common – besides being (arguably) tedious, they portrayed inheritance as a central aspect to class stratification in nineteenth century society, when the best route to wealth was by inheritance. That idea had vanished by the 50’s, when meritocracy appeared to have triumphed. However, Mr. Piketty predicts that inheritances will again gain relevance, due to the mitigation of rapid population and economic growth. He estimates the annual bequest flow in France to reach up to 25% of national income by 2050, in comparison with 15% in 2010. Research in the UK confirms that inherited wealth will likely play a more important role in determining the lifetime economic resources of younger generations, due to a higher level of wealth of the elderly generations paired with the increased difficulty younger generations face in accumulating wealth of their own, which creates implications on social mobility and wealth inequality.

Inheriting large sums of wealth and then using them to generate even more unearned wealth is the exact opposite of meritocracy, and it tends to give lasting, disproportionate importance to inequalities created in the past (Piketty, 2013). In democracies, the government is responsible for the redistribution of resources, and inheritance and merit are incompatible ways to do that. Evening out wealth inequality requires breaking up wealth concentrations, which many believe can be solved with higher taxation. Oxfam estimates that $7,6 trillion have been lost in global tax revenues due to tax havens. Unpaid taxes translate in government cuts and reliance on indirect taxation, disproportionally affecting the poorest.

There isn’t a completely reliable evaluation of the impact of inheritance on economic distribution yet, but what is vastly agreed upon is that the opportunity to build wealth in contemporary society is not equally shared by all. With wealth inequality and the importance of inheritance on the rise, a more egalitarian economic system –  where the opportunity to attain economic security is the parameter by which societies are measured, rather than by the great wealth of the top 1% – does not seem to be on the horizon.

Marta Fiolhais

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Author: studentnovasbe

Master student in Nova Sbe

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