Does inheritance from parents inhibit mobility? This is a question I have pondered since I sat in on the Ways and Means committee discussions at the Indiana Statehouse in 2012. The inheritance tax was repealed that session, eliminating millions in revenue that Indiana would have used for other purposes.
The inheritance tax and estate tax are designed specifically to reduce the concentration of wealth at the top. Tax avoidance strategies require careful planning, and can be costly to pursue. Although not a significant portion of total revenue (<1%), the estate tax alone generates billions ($19.3 Billion in 2014) in federal revenue each year that can be allocated to other purposes. It is nontrivial, and all costs and benefits should be considered when making policy decisions about such taxes.
The real question for our purpose is whether inheritance reduces mobility. When money can be passed down from generation to generation, gaining interest each year, it is not hard to imagine an eventual concentration of wealth such that certain families perpetually remain in the top 1%. This is not necessarily a bad thing in itself, except that it comes into direct conflict with the “equal opportunity” concept and can be perceived as unfair.
Because most studies of mobility focus on income mobility, aspects of wealth are often left out. If mobility studies are interested in equal opportunity, it makes sense to focus on individuals ability and likelihood of earning a decent living. Fortunately, researchers Samuel Bowles and Herbert Gintis decided to examine a number of aspects of inheritance, including wealth, IQ and educational attainment to see how each of these factors affect the inheritors. Providing their response in a report called The Inheritance of Inequality, they found that inheritance played a smaller role than expected:
“We find that the combined inheritance processes operating through superior cognitive performance and educational attainments of those with well-off parents, while important, explain at most half of the intergenerational transmission of economic status.” (2-3)
Additionally, they found that the wealth aspect of inheritance explained about a third of the influence on inheritor’s income:
SOURCE: The Inheritance of Inequality, 22
The authors discuss estimates of the number of people affected by significant wealth inheritances. These are low, estimating that only about 2-4% of Americans receive a significant transfer of wealth upon the passing of parents or others. (Bowles, Gintis 17)
It could be that these individuals are passing on most of their wealth before death. However, other research indicates that most individuals with wealth to pass on to their kin actually do a very poor job of planning ahead, which is necessary if one is to avoid taxes. (A clarification for those unfamiliar with these terms: Tax avoidance uses legal means to avoid taxes, taking advantage of deductions, loopholes, etc. Tax evasion is illegal).
In Bequest and Tax Planning: Evidence from Estate Tax Returns, Wojciech Kopczuk explains that individuals who become terminally ill do a better job of planning their estate and die with a smaller estate than those who only fall into temporary illness, suggesting that individuals tend to hold on to their wealth until death is imminent. The author does not suggest that these individuals are selfish, but rather are conflicted about how long to wait.
“It appears that while people do care about bequests, they attach value to holding on to their wealth. In other words, planning a priori is costly, either in financial, strategic or psychological terms.” 26
In my view, when considering the real issue is fairness and equality of opportunity, wealth transfers are less important for mobility than equal access to social structures, quality education and job opportunities. Individuals at the higher end of the wealth and income structures have an advantage there, but encouraging upward mobility should be done in a way that does not discourage parental investment in children, at any level of income.
Next week we will be reviewing how education impacts mobility. As always, feel free to contact me through the Contact Page, and follow along with the readings posted here: Inequality, Social Mobility and Public Policy Syllabus
Inequality and Public Policy 