How much of our capital stock is inherited? Though the wealth of the top 1% is usually defended in the most heroic of job creator terms, some of it must be inherited. This will have implication for the optimal taxation of capital, which is part of the debate over the Ryan Plan and the Buffett Rule.
This is a hard thing to figure out. Here’s the beginning of Barbara Fried’s Who Gets Utility from Bequests? (1999) reviewing several studies: “Private savings ultimately destined for intergenerational transfer, through inter vivos gifts or bequests, account for a very substantial percentage of the U.S. capital stock at any one time. Estimates of the percentage range from 15 percent to as high as 70 percent, and average about 50 percent…they are heavily concentrated…among the very wealthy (the top quintile in lifetime income, and even more dramatically the top 5 percent).”
I asked Emmanuel Saez via email if there was any new evidence on this, and he said there wasn’t but to check out a new paper, On the Long-Run Evolution of Inheritance: France 1820-2050 (2011), by his frequent co-writer Thomas Piketty.
Saez and Piketty are the people who have given you the U-shaped chart on the income share of the top 1%. It was high before the Great Depression, low in the mid-century, and now it’s high again. Well here’s a fascinating chart on how much of national income in France is inherited by year from the Piketty paper:
When it came to inheritance as a matter of national income, economists ran with “the implicit assumption…that the structure of modern economic growth has led to the rise of human capital, the decline of inheritance, and the triumph of meritocracy.” However Piketty finds that “Our empirical and theoretical findings suggest that inherited wealth will most likely play as big a role in twenty-first-century capitalism as it did in nineteenth-century capitalism.” Maybe that whole Jane Austen revival thing isn’t a fluke.
We can see from France that the inheritance flow – “the total market value of all assets (tangible and financial assets, net of financial liabilities) transmitted at death or through inter vivos gifts during a given year” – is rising rapidly and will likely hit it’s 19th Century level in the next few decades.
They look at France because France has excellent data on this, enough to construct two separate measures. For all other countries this specific level of data is hard to find. But what can we say about the United States? Wealth over National Income is an important building block for their model:
This asset price effect also explains why the wealth-income ratio seems to have fallen substantially in countries whose territories were not directly hit by the wars. In the United Kingdom, the private wealth–national income ratio was apparently as large as 650–750% in the late nineteenth and early twentieth centuries, down to 350–400% in the 1950s–1970s, up to about 450–550% in the 1990s–2000s. In the United States, it seems to have declined from about 550–600% in the early twentieth century and in the interwar period to about 350–400% in the 1950s–1970s, up to 450–500% in the 1990s–2000s. This suggests that both countries have gone through the same U-shaped pattern as France—We stress, however, that these illustrative U.K. and U.S. figures are not fully homogenous over time, nor are they fully comparable to our French series.
(Side note: Interesting example of abstract economic theorists reflecting and reproducing the social reality of the times they live in: “In the 1950s and 1960s, economists started developing the life-cycle approach to wealth accumulation…In the life cycle model, inheritance plays no role at all, individuals die with zero wealth…It is interesting to note that this theory was formulated precisely at the time when inheritance was at its historical nadir.”)
Wouldn’t this be a fascinating thing to see for our current, second Gilded Age in America? And wouldn’t this be a great thing to tax? It’s hard to imagine people refusing to be born to wealthy parents because we closed thing likes the inheritance “step-up in basis” loophole.