The aspiring young law student Rastignac has his choice set out for him with brutal simplicity in Balzac’s 1835 novel Father Goriot. He can work: “There’s a nice prospect for you! Ten years of drudgery straight away.” Or he can do otherwise: “There is but one way, marry a woman who has money.”
Choosing between hard work or an heiress may seem archaic but according to Capital in the Twenty-First Century, an eagerly awaited book by the French economist Thomas Piketty, Rastignac’s dilemma is coming back. (The book is not out in English until March but its argument is already scattered around the internet along with Prof Piketty’s academic work.)
The choice has returned because of the rising importance of inherited wealth – on a scale that, for some, will make it a viable alternative to work. It poses a profound economic and social challenge to rich countries that believe they offer equality of opportunity. The UK is already getting a taste: high house prices in London, in particular, mean that, for many, inheritance is the only way to buy one.
The return of inheritance is not due to greater inequality or plutocrats in the top 1 per cent. Rather, it is a result of slower economic growth in rich countries. The lower the rate of growth, the smaller the percentage of society’s total wealth created by those who are alive today, and thus, by definition, the larger the percentage that is passed on from previous generations.
The first countries affected, therefore, are not the most unequal but those with the slowest growth. In France, Prof Piketty charts how the annual flow of inheritances was between 20 per cent and 25 per cent of national disposable income in the 19th century. It fell to about 5 per cent in the middle of the 20th century after two world wars destroyed most of the inheritable capital stock, followed by rapid growth, high taxes on capital, inflation that eroded existing financial wealth and labour-friendly laws.
But the flow of inheritances in the country is now back to 19th-century levels; it is heading that way in the US and UK too. It may be that we had a meritocratic moment in the last century but mistakenly decided that state of affairs was permanent.
Such mountains of inherited wealth dwarf the nest-eggs that people can accumulate by saving. In France, for example, the savings rate is more than 10 per cent of disposable income. The biggest savers, however, are those who enjoyed an inheritance – it is a lot easier to put money aside if you inherited a house and do not have to rent one. Consequently, such a flow of inheritances means they can account for more than 80 per cent of total wealth.
Greater inequality may not be the main cause of higher inheritances but higher inheritances certainly exacerbate inequality. If wealth is not evenly spread across society then inheritance repeats the pattern.
If, as Prof Piketty argues, the after-tax return on capital is higher than the rate of growth in the economy, then all heirs and heiresses need do is save enough of the income from their inheritance. So long as they do that, their share of society’s wealth will rise, or at least stay the same.
What to do about a rising share of wealth from inheritance is an age-old problem: it depends on how much society values equality of opportunity and outcome versus its distaste for redistributive taxes. The conclusion to Prof Piketty’s much broader book about capital – and his clear preference for redistribution – is a call for wealth taxes on a global scale.
That is a utopian prescription. But it is also possible to draw more immediate policy conclusions. The simplest answer is to increase the rate of economic growth, so that more wealth is created in our lifetimes. This is a powerful argument for more immigration into rich countries – and, therefore, for the passage of the US immigration reform now stalled in the House of Representatives. It also argues for all the usual supply-side reforms to bolster growth.
In any society that is willing to tolerate redistribution via estate duties and inheritance taxes, falling growth is a reason to increase them. In a recent paper with co-author Emmanuel Saez, Prof Piketty argues that the ideal rate of inheritance tax for the US and France is about 50-60 per cent. The optimal rate increases as growth falls relative to the return on capital.
At the least, in a world where more wealth is being inherited, it makes no sense to cut existing taxes on estates.
In the UK, the coalition government wisely decided against a cut to inheritance tax promised in the 2010 election campaign. In the US, the “fiscal cliff” in 2013 put the estate tax back to 40 per cent, but created a large exemption for estates of less than $5m.
As the baby-boom generation begins to confront its own mortality, political pressure to cut inheritance taxes will rise. That is a natural consequence of the desire that many people have to pass on wealth to their children.
Yet resisting such pressure should be a crucial goal in the coming decades. Particularly in the US, where policies, once established, are difficult to change, it is important to keep the estate tax in play now.
In the Balzac novel, the villainous Vautrin exhorts Rastignac to take the easy path: “You are at the crossway of the roads of life, my boy; choose your way.” Developed societies now face a similar choice. They should opt for the free-flowing meritocracy of the last century, not a return to the dynastic wealth of the one that preceded it.
Letters in response to this article:Young simply have to buckle down / From Mr Bruce Mathers