What caught my eye this week.
There’s a growing sense – I’d argue a reality – of intergenerational inequity in the UK, as with many other developed countries.
Whether the old having so much more than the young is an inevitable consequence of late capitalism, a comorbidity of a broken housing market, the demographic bulge bracket baby boomers not paying their way, or just what happens when an economy is no longer booming like it did in the 1950s and 1960s is hard to tell.
Probably it’s a bit of everything. But in any case, assuming we don’t want to transition permanently into neo-feudalism, the next question is what’s to be done?
One option is to directly favour the young with government largesse. For various reasons, mostly political, we’ve triple-locked away that solution for now.
The other obvious redress, redistribution, is even more controversial. At least outside of the editorial meetings of Socialist Worker.
Redistribution – taxing those with more to give to those with less, obscured by so many smoke and mirrors – at least treats the thing directly. Handy if the age aspect is a red herring, and really we’re just looking at greater wealth inequality.
The big snag though is that redistribution tends to infuriate those whose stuff is being redistributed.
As the UK tax take of GDP soars, statistics showing the top 1% already pay 30% of all income tax imply they have a point – even if income tax is not everything.
The bank of grandmother and grandad
There’s one kind of redistribution that both the richest and the rest of us tend to support though.
And that’s inheritance passing wealth down the generations.
True, long-time readers know that this is where I’d personally position the nation’s best tax-collecting apparatus.
On both moral grounds and in light of my neo-feudalism fears, I’d far prefer to tax dead people who can’t feel the pain than young people working, saving, and still not having enough money for a house deposit or a proper pension.
But hey, I’m in a minority. Inheritance tax is widely considered to be the UK’s most unpopular tax. Most people hate it.
And yet it exists – and from the perspective of its critics, it gets in the way of the frictionless redistribution from the father to the son.
(And the mother and daughter of course, but as we’re in the realms of neo-feudalism here, let’s have all the trimmings!)
How soon is now?
By far the best and easiest way to avoid inheritance taxes tithing such wealth transfers is for the eventually-to-be-deceased to give their money away sooner.
Currently no tax is due on anything given away if you live for seven more years.
To me, this longevity lottery seems a bit ridiculous – if again entirely in keeping with the same medieval thinking that makes inheritance taxes so unpopular.
Why should a family be penalised because a beloved elder gets an unexpected cancer or meets the wrong end of a bus?
Nevertheless, encouraging the rich to pass down their wealth sooner does have one undeniably huge benefit, as Jonathan Guthrie outlines in a (paywalled) article in the Financial Times this week.
As things stand, Guthrie writes:
…the most striking feature is how little we decumulate. Most folk die with more than 60 per cent of their peak lifetime assets.
Adult offspring are therefore liable to inherit large sums when they themselves are approaching retirement, when the utility of the money may be lower.
Giving sooner improves the lives of heirs earlier, and in material ways. Perhaps the chance for a parent to take a few years off to care for young children, or for a family to buy a house with bedrooms for all the kids from the start. Compare such uses to the money simply sitting in a septuagenarian’s bank account, maybe with a bit of the interest funding one more Caribbean cruise that gilds the lily.
Earlier inheritance might even help with the housing market, if it reduces the tendency for older generations to rattle around in big houses full of rooms they don’t use while young families grin and bear an open-plan kitchen-diner-hallway-sofa-bedroom.
Well, solves it for the moneyed classes at least. But that’s neo-feudalism for you…
An age-old story
Guthrie suspects traditional inheritance practices have yet to adjust for extended longevity, writing:
When lives were shorter and child-rearing began earlier, legacies from dead parents materialised closer to the point of greatest utility for heirs.
This must be right. Even oligarchs in the Middle Ages were lucky to make it to 60.
Naturally we all want to live longer lives. But if it means ever more wealth piling up at the right-hand of the curve where it’s unlikely to ever be spent, then something – literally – has to give.
I’d suggest if we’re to avoid a ‘Gen Z Uprising’ in the history books alongside the First Baron’s War, the Peasant’s Revolt, the Boston Tea Party, and the Bolshevik Revolution then more efficiently keeping it in the family isn’t going to be enough in the long run.
But getting wealth redistributed sooner – to where it will do the most good for those who are fortunate enough to inherit – is at least a start.
Have a great weekend.
p.s. Thanks to everyone who entered our Christmas sweatshirt competition. I’ll contact the winners this weekend to make sure they’re not Russian chatbots or whatnot, and announce the ‘lucky’ recipients next Saturday!
From Monevator
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The biggest risk for new retirees – Morningstar
Revisiting ‘safe’ retirement rates for retirees – Capital Spectator
Naughty corner: Active antics
Hold the dip [PDF] – AQR
How investment trusts are adapting to the new realities [Paywall] – FT
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Bitcoin ETFs are new. Investor underperformance is an old story – Morningstar
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What if the economy was modelled after ecology? – Atmos
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The case that we’re over-investing in AI infrastructure – Paul Krugman
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Can machines suffer? – Aeon
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Why we save anything at all – The Root of All
And finally…
“Money often costs too much.”
– Ralph Waldo Emerson, The Conduct of Life
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Personally I’d prefer a flat tax, I can’t see the justification for most of the country avoiding it just because they live in an area where property prices are lower.
I’m not sure how the figures work out but there is a case for making it low enough that it isn’t worth the effort to avoid.
Having said that my least favourite tax is stamp duty, it’s a drag on the economy and should have been eliminated a long time ago.
Here to read about money and investment, but really, more politics? I already quit the paid subscription after the last political rant from @TI, now I must postpone rejoining for some more months.
This thinking is based on the assumption that there is a fixed pie and we need to rob Peter to pay Paul. Consider how things were 200 years ago. Aristocracy owned all the land, everyone else was a peasant. What has happened since then? Some re-distribution, but an awful lot of everyone doing better. Could we not think more about what in the US is known as an ‘abundance mindset’ rather than a ‘scarcity mindset’? Hand-ups rather than incentive destroying hand-outs?
The Guthrie quotes strike a chord. I am 70, have spent 24 years shepherding and accumulating the pot, I have de-risked, mainly to avoid the coming IHT change, so why do I find it so hard to begin to decumulate? I guess it is because, over time, the pot has become ” my precious”
Perhaps my kids will become as exasperated with me as I did with my parents when they refused to spend the kids inheritance.
@TI. Still can’t quite get why you think that redistribution (theft) of individuals wealth by the State will have a better outcome than the market place of individuals deciding how to redistribute (give) their wealth.
I think you are of the opinion that the free market, on balance, is far more effective at dragging the masses out of poverty than a govt. centrally planned economy (I don’t think there are any historical exceptions to this) – so why would wealth redistribution be a special case where the State is more effective ?
@Algernond — I don’t necessarily think IHT is better than the free market. But I do think it’s better than income tax. This is the bit we always disagree with. Your point is a case against taxes, not pro-IHT. Given we have taxes and a state etc, I prefer IHT.
@Baron — You’ve made this point at least half a dozen times. I last addressed it last week and to be honest I’m bored of your near weekly complaints.
See: https://monevator.com/weekend-reading-a-dawning-realisation/#comment-1923519
If you don’t like our site don’t read it. No hard feelings. Simple! 🙂
Will delete from now on without further comment. Cheers!
Since few of us know or choose the time of our passing, there is an instinctual fear of running out of money. And, having managed money for 3 relatives paying for residential care, and looked round numerous institutions, the fear is understandable. This is another issue successive governments have flunked.
We have helped our daughter at an age where the money was of maximum utility to her, and (hopefully!) with at least 7 years in hand. We are also helping through an account linked to her offset mortgage – which enables us to help reduce her mortgage payments/term, whilst retaining ownership of our capital for future needs. Perhaps this inter generational deployment of capital should be encouraged more widely?
Personal view is that I’d rather give £50k to someone in their twenties than £500k to someone in their sixties – as if they spend that £50k right they might not need the £500k in their sixties.
Equally people should remember that care is expensive if you don’t want to be dumped in a ditch in your old age. First to support in home quality of life extension (while owning a home), then £1k per person per week (probably having sold a home).
Otherwise people shouldn’t be too afraid of spending it and enjoying it before they die. Targeted inheritance can offset the guilt by giving people what they need at the times they need it most.
@ TI. Hmm,
‘assuming we don’t want to transition permanently into neo-feudalism’
I don’t accept the way you have framed this question. I shan’t comment further.