Wealth concentrates and inheritance from one generation to the next makes the effect stronger and longer lasting. The effect is exponential and becomes more pressing over time. It also has some secondary effects.
The concentration of wealth into the hands of a few people sometimes leads to a corrupting influence on government. It can also lead to an ever increasing part of the electorate who will want to redistribute wealth. They will vote accordingly or even resort to force at some point.
If you study history to see how society progressed with heavy concentration of capital, it appears that making changes is almost impossible.
Examples may be the end of the roman empire or the situation at the end of the aristocratic times in Europe. The concentrated capital will be very heavily embedded in society.
Some cultures have noticed this process and have tried to alleviate the effects or even constructed laws against it.
Even today (at least in the Netherlands) it is obligatory to divide an estate amongst all siblings. Experience from medieval times has taught us that if all inheritance is passed on to one sibling only (i.e. the eldest son), wealth accumulates throughout the generations.
In extremo, this leads to one lucky person holding all property rights in the long term. The Roman Church (at least in France) had to be dis-owned during the French revolution. The Habsburgs’ during the first world-war.
There are many other examples. Going back a long time, the law was mingled with religion. A very old indication from the past for example comes from the Qur’an. In verse 2:275 it is stated that:
The Chinese, Indian’s and many others apparently recognised the problem as well. The Vedic text are said to warn against it (I did not check).
The Torah (and bible) has a very old reference. From Leviticus 25:
In Leviticus 25 (part of the old Jewish laws, about 500 BC), it is explicitly prescribed that a jubilee year should be held regularly. In that year, all property (mainly land in this case) is returned to the ‘original’ owners. According to the Torah, the economy should be reset every 50 years.
Not a bad idea, then, maybe…?
We could do the same today, for example by declaring all bonds void on a certain date.
However, in all of the Chinese, Indian, Islamic, Jewish, Christian etc. cultures, the Jubilee has in practise never really happened.
I am fairly confident, too, that nowadays it would be difficult to enact a law like this.
Taxing economic activity
Our current tax system largely taxes the active economy. There is a tax on work/income, one on spending, one on dividends/interest etc. It seems fair.
These taxes have a great influence on the behaviour of people and the economy.
Income taxes generally reduce specialisation: it becomes more expensive to buy a service/product and relatively cheaper to do it yourself, because then you do not pay the tax. The specialist gets less of the work.
As such, taxing income carries a real cost.
Inheritance tax
A better solution could be to tax economic assets after people have finished with them. The idea is not to tax the active economy, but instead to tax inheritance at a rate of 100%. That is to say: all and everybody’s possesions go to government.
Also, all income is then untaxed throughout an individual’s life. At death, all estate of a person reverts to the state. The state sells the assets and funds itself in this way.
In the past, when the tax system was designed and the king equalled the state, this may have seemed unfair: one person would automatically get everything. However, as the state in most countries is now owned by everyone, it may be more acceptable.
Citizens will be able to build up capital much quicker, because they will pay no tax on earned income. No wealth concentration through the generations will occur though. Everybody will start their lives on a more equal basis.
It may even be better for today’s children (the inheritors of wealth) as they will realise early in life that they will have to fend for themselves and will need to develop sellable skills.
The economy will be less distorted by taxes. This will not only make it more efficient but as a side effect there will be less urge to influence tax rules by various groups.
Practicalities
Enforcability is always an issue with taxes. However, this tax could be easier to enforce than the current ones. All estates go to the government, including domestic parts of estates owned by foreigners.
A 100% inheritance tax means that all wealth owned by residents should be earned through income and would have to be accountable as such.
Calculations
With an average life expectancy of 80 years, government would receive about 1/80th of total wealth in the country per year. As an example, for the Netherlands (2015) this would mean 3.7T / 80 = approx. €46B. According to NRC, the total value of inheritance in the Netherlands is even lower: estimated at €14B
This is a bit disappointing: with this money, income taxes could not even be abolished entirely. They were €51B in the Netherlands in 2015. However, it would go a long way.
Two additional problems I could immediately think of are:
1. how to deal with rich foreigners moving into the country? Especially people that have been resident outside the country for a short while and have inherited large sums of money during that period.
2. Government would benefit from citizens dying, This will include wars. It should be possible to legislate around this issue, though.
Just a thought… Good idea? Let me know what you think in the comments!