Quote of the week

Over the last 150 days we have learned much about the power of the habitual in post-millennial, post-apartheid South Africa. We have heard it in the grumbling, cavilling, quarrelling and grousing about the logic (or lack of) of government decrees. We have also seen it in the defiance of logic among the many bourgeois folks who mistook their entitlement for rights, whether to go running, do yoga on the beach, surf, get takeaway coffees, or to purchase items subjected to restricted trade… We saw it in the contradictory messages relayed by official government channels, in the conflict between some experts advising government, between government officials and such experts, and in the ways in which opposition parties contradicted themselves as they opposed government proclamations.

Angelo Fick
Johannesburg Review of Books
15 June 2020

Further thoughts on the disruption of the intergenerational transfers of wealth

My call last week to reimagine how we deal with the transfer of intergenerational wealth, was, let’s say, not well received. (“Fuck you” and “jy is ‘n doos” can be rhetorically effective expressions of emotion – but do not constitute an argument. In any event, like Antjie Krog, I prefer the poetic power of poes.) Luckily, there were also thoughtful and nuanced responses, which – as good arguments often do – made me think and sent me back to the academic literature. I therefore propose to further the debate in this follow-up piece.

First the good news. Hardly anyone challenged the accuracy of my claim that inheritance is not meritocratic because it gifts inheritors unearned benefits (Mill, 1848/1976, p. 808; Piketty, 2014). Hardly anyone challenged the claim that inheritance perpetuates and even exacerbates inequality (Brownson, 1840, pp. 33–34; Pikkety, 2014) and that there is a racial sting to this. This is partly because most adversaries did not make any arguments.

But, I am going to assume it also means that critics generally do not (or cannot) dispute that there is a problem, but only object to my idea to address the problem. Their complaint is not that inequality is not a problem which perpetuates a deeply unfair system along racial lines, but that in the case of inheritance, their individual freedom should trump any equality concerns and thus any concerns about societal justice.

The most striking aspect of the vast majority of the responses was their emotional and enraged tone. I have a theory why this is so. Challenging the widely accepted ideology on inheritance (because it is an ideology) as it applies between parents and children is perceived as a challenge to another ideology, that of the nuclear family (Young, 1997-98). In most of our various cultures the notion of family solidarity is very strong. Bequeathing one’s wealth to one’s children affirms a particular type of family solidarity and satisfies an emotional need to affirm a specific type of familial bond.

However, families “come in many shapes and sizes” and the “definition of the family also changes as social practices and traditions change” (Dawood and Another v Minister of Home Affairs and Others at para 31). A majority of South African families are extended families, not versions of the nuclear family being invoked in the discussion over the intergenerational transfer of wealth. This is not a surprise as the rules of inheritance governing intergenerational transfers of wealth favour “traditional” nuclear families over other kinds of families. Much criticism of a steep inheritance tax is therefore in defence of a certain kind of (privileged) family (and the higher status of that family) to the exclusion of the majority.

Although I am not unsympathetic to the urge to give your children an (unearned) advantage because of your love for them, I place more emphasis on another value, namely that of social solidarity. (Another possible reason for the anger – to which I am not sympathetic – is that the practice of inheritance confronts specifically white people with a tangible and undeniable example of how unearned privilege is transferred from one generation to the next.)

In pre-modern time, the family was seen as joint owners of the family property, which necessitated the development of some form of inheritance. However, as John Stuart Mill notes – speaking of early nineteenth century Western Europe – “property is now inherent in individuals, not in families” (Mill, 1965, p. 219). Therefore, it is not sufficient to merely claim that children have a right to their parent’s belongings, as this claim is based on a system of property relations that no longer exist in many parts of the world (Cappelen  and Pedersen, 2018, p. 320). In this view, inheritance would be justified for South Africans who live according to indigenous law, as in this system, families occupying communal property are seen as the central unit of a society.

At the heart of my call for a rethink of inheritance law is a belief that social solidarity should weigh just as heavily for us as a society as narrow familial solidarity and naked self-interest. Social solidarity is based on the idea that all people count equally, that there is an interdependence between individuals in a society, “which allows individuals to feel that they can enhance the lives of others. It is a core principle of collective action and is founded on shared values and beliefs among different groups in society” (Douwes et al, 2018, p. 186).

The call for a turn to social solidarity is a call to move towards a society where everyone has a feeling of being, as it were, in the same boat (Dworkin, 2000, pp. 346–349; Halliday, 2016, pp. 103–110). The Constitutional Court of Columbia has endorsed social solidarity as a principle contained in that country’s Constitution (Morgan, 1999, p. 309), and many judgments of South Africa’s Constitutional Court can be read as embodying the value of social solidarity.

That said, let me respond to specific complaints about my proposal.

Claim 1: Drastically limiting the amount that a parent can bequeath to a child is a novel or radical idea.

As Max West pointed out more than 140 years ago, the “abolition of intestate inheritance as to all but the nearest relatives has been advocated by writers of the most diverse economic views. Bentham, Enfantin and Bluntschli may be cited as representative examples” (West, 1893, p. 427).

John Stuart Mill – who is revered by many “liberal” South Africans because of his perceived fathership of freedom of expression – went further than Bentham, arguing that the right of children to inherit should be radically curtailed (Cappelen  and Pedersen, 2018, 319). Mill made a distinction between the right of the parent to bequeath (which he supported) and the right of the child to inherit (which he believed should be radically curtailed).

Mill wrote in Principles of Political Economy that “each person should have power to dispose by will of her whole property; but not to lavish it in enriching some one individual, beyond a certain minimum” (Mill, 1965, p. 224–225). He believed that limiting the right to receive bequests is in the best interest of children because it would provide them with stronger motivation to develop and exercise their own individual capacities (Mill, 1965, p. 221–222). Mill’s proposal was to set an absolute upper limit on how much it should be possible to receive in inheritance from a parent (Cappelen  and Pedersen, 2018, p. 320).

This view accommodates those who say that their money is hard-earned and that they should have a right to do with it what they want. As the money will not be hard-earned for those who inherit it (in fact, not earned at all), it would be no problem to tax the inheritance of the children to whom the hard worker had bequeathed their wealth.

Per example, supposed the law fixes the absolute amount a child could inherit at R1 million. This would mean (in one reading of Mill) that if a person bequeaths R10 million to his only daughter, she will receive R1 million. But as Cappelen and Pedersen point out, Mill could also be read to propose that everything above an upper limit should be heavily taxed but not completely forfeited. Now suppose that the limit is set at R1 million and that everything above is to be taxed at progressive rates with a top marginal rate at, say, 65 percent. We tax the first million above the limit at, say, 30 percent, the next 2 million at, say, 50 percent, and the the next 2 million at, say, 50 percent, and the last 6 million at 65 percent. Following this scheme the daughter would inherit R4.8 million upon her father’s death. (This example is borrowed form Cappelen and Pedersen, 2018, pp. 322-323).

Deon Gouws, in his thoughtful response to my original proposal, I believe, endorses a version of this second option. I could easily endorse the idea that inheritance be curtailed by taxing not the estate of the dead person, but the recipients of the cash. While adopting Gouw’s proposal would be a good start I would prefer a cap on the absolute amount a person should be able to inherit from his or her parents. This is, first, because it is not in the best interest of children to inherit large sums of money as this may make them less industrious and, second, without a cap the tax would be less effective in curtailing the intergenerational transmission of inequality. Whether inheritance is capped at R1 million or R10 million (or some other amount) is not a matter I take a firm view on here.

In his day, Mill’s ideas, such as his support for freedom of expression, were viewed as novel, but today he is widely regarded as a cuddly liberal. Which is why it is not surprising that France has a flat rate inheritance tax of 65% for non-family members (the rate is much lower for children) and why the conservative government in Japan recently increased the top rate of inheritance tax to 55%. (South Africa currently has a low, but not insignificant, inheritance tax of 20% for inheritance up to R30 million and 25% above that – although rebates apply to exempt small bequeaths.)

Claim 2: Heavily taxing inheritance will reduce people’s motivation to work and save

There is some disagreement about the precise effect that wealth transfer taxes can have on the donors’ willingness to work and save (Cappelen and Pedersen, 2018,  p. 327). After reviewing the literature Murphy and Nagel conclude, that “the consensus seems to be that a tax on gifts and bequests has little or no proven impact on donors” decisions whether to work or save’ (Murphy and Nagel, 2002, p. 152). Kopczuk and Slemrod found that the tax could have an impact (Kopczuk and Slamrod, 2001, p. 339), but that there is “almost no empirical evidence supporting claims of a large effect or of a negligible effect” (Kopczuk and Slemrod, 2001, p. 300; Cappelen and Pedersen, 2018,  p. 327). Garbinti and Goupille-Lebret, reviewing the French literature, also conclude that “the impact of inheritance taxation on wealth accumulation turns out to be limited” (p. 17).

Conversely, there is significant evidence that receiving a large inheritances would have a negative impact on the work ethic of those who receive it. Holtz-Eakin et al. (1993) found that a single person who receives an inheritance of over $150,000 (by 1992) is roughly four times more likely to leave the labour force than a person with an inheritance below $25,000 (Holtz-Eakin et al., 1993, p. 413). There is also evidence that a large inheritances speed up retirement (Joulfaian, 2013, p. 7–5). This means imposing a large inheritance tax could increase productivity – at least of those who would have inherited large sums but for that tax – and could thus be good for your children (if you believe in the benefit of earning money through hard work).

No wonder the Organization for Economic Co-operation and Development’s (OECD) concluded that inheritance taxation is in comparison to other taxes much less distortionary partly because “a large part of inheritances is unplanned” (OECD, 2010: 119).

Claim 3: It is not practical to impose a steep inheritance tax and it will be avoided

These are weak arguments as they do not addresses the principle I argue in favour of. Of course there may be practical problems and of course the wealthy will try and evade or avoid paying this tax, as they tend to do with all tax, but that says nothing about the justness of the idea. In any event, opponents of fundamental change often invoke such arguments, as this allows them to avoid engaging with the principle itself. For example, the implementation of equal pay for equal work for men and women were vehemently opposed for similar reasons, but that does not mean the principle is wrong. At best it is an argument that the concept should be carefully implemented and should be accompanied by other changes in the manner in which the economy is structured. At worst, it is a diversion.

Claim 4: Imposing severe restrictions on inheritance will destroy tax morale and will lead to tax avoidance and evasion

In his response to my original proposal, Deon Gouws argues that imposing a 100% inheritance tax would destroy tax morale, partly because it would be extortionate. In other words, it would destroy the intrinsic willingness of people to pay tax. At first glance, this is a strong argument, especially if you accept the strongest version of my proposal (the imposition of a 100% inheritance tax) and you assume that the tax will be implemented tomorrow without any changes in the attitude of the public or in the structure of the economy.

Tax avoidance and evasion – especially by the wealthy – is obviously a real problem. Piketty (2014) and Bregman (2017) emphasize that one of the fundamental problems related to inequality is that the rich do not pay their fair share (Gangl and Torgler, 2020, p. 109). Empirical evidence show that wealthy people have a lower tax morale and that the motivation to engage in tax evasion and avoidance increases with wealth (Hofmann, Voracek, Bock, & Kirchler, 2017). Almost all studies report that the wealthy are (on average) less tax compliant than middle‐class citizens ((Gangl and Torgler, 2020, p. 114). However, age, education, gender, religion and trust in government also influence tax morale.

Gouws is correct that perceived unfairness of a specific tax is another reason for a reduction in tax morale and in tax compliance. One possible reason for the low tax morale among the wealthy is the perception that tax rates are unfair (Sawaoka, Hughes, & Ambady, 2015; Gangl and Torgler, 2020, p. 128). However, researchers have also found that wealthy individuals who believe that their contribution is critical to group success feel responsible and are more likely to be tax compliant (De Cremer & van Dijk, 2017; Gangl and Torgler, 2020, p 129).

In South Africa, trust in government is a major problem. Corruption, a lack of transparency, and incompetence all diminish trust in government. But trust is also diminished by the racism of at least some of those who distrust the government the most. This impacts negatively on tax morale for the payment of all taxes. But this does not mean most people support the abolishment of all taxes. This is because lack of trust in government does not speak directly to the correctness of the principle involved. Similarly, the correctness of the principle that it is unjust for children to inherit sizeable amounts form their parents is not affected by distrust in government. (It would therefore be perfectly fine to say: “In principle, I agree with capping inheritance tax, but only once government corruption and inefficiency have been reduced.”)

This means the point about tax morale is really a different point, namely that the proposed inheritance tax is unfair, or that the middle classes and the wealthy will perceive it to be unfair. As things stand, I have to concede the second point as most wealthy South Africans display little solidarity with those who are not wealthy and probably believe that a steep inheritance tax on themselves is much more unfair than the perpetuation of inequality through intergenerational transfer of unearned wealth. They choose personal freedom over equality for all.

My intervention is an attempt to get the wealthy and middle classes to see that the current inheritance system is unfair and to accept the fairness of a steep inheritance tax. It is a call for South Africans, but especially the wealthy, to develop a much stronger sense of social solidarity and to strike the balance between their own freedom self-interest, and the interest of society as a whole in a slightly different way.

I do this by pointing out that inheritance is not a natural and unchanging concept, but one that developed over time and, at different times and in different societies, have served a different purpose. I further argue that the effect of the current inheritance law is to create and further perpetuate injustice for the benefit of the few to the detriment of the many. I argue that social solidarity is a social good (also for the wealthy), as it contributes to the reduction of conflict and crime, an increase in productivity, and a general increase in the quality of human interactions.

If it becomes widely accepted that social solidarity is good for society, and that addressing inequality and its effects are sometimes just as important than providing absolute protection for the individual – fundamentally self-interested – freedom, the belief that an inheritance tax is unfair will diminish and will have less of an effect on tax morale.

But all this depend on a change of mindset and an acceptance that we are all in the same boat, something that privileged South Africans have shown a profound reluctance to consider. It requires the creation of a different kind of society with different values in which the imposition of an inheritance tax will be one of many tools used to create a more just society. It requires imagination and a willingness to listen and to consider the possibility that there are different ways of arranging our world in a more just and humane way. Of course, I am well aware that in the short term this is unlikely to happen.

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