Would The Economy Gain From Spreading Inherited Wealth?

The widespread belief that the rich grew richer in the past decade has received dramatic confirmation in a newly released study by government researchers. The study estimates that the top 1% of families--totaling less than a million households--increased their share of the nation's total private wealth by a startling five percentage points in just six years, from 31.3% in 1983 to 36.2% in 1989. Indeed, by the end of the decade, their net worth of $6.14 trillion was almost a fifth higher than the entire net worth of the bottom 90% of families.

While these statistics received wide media coverage, the real news is that the shift in wealth was even more narrowly focused. The new study, by Arthur B. Kennickell of the Federal Reserve and R. Louise Woodbum of the Internal Revenue Service, indicates that despite appreciable gains in net worth, the bottom half of the top 1% of families actually suffered a slight decline in their share of private wealth from 1983 to 1989. In contrast, the share of the top 0.5% of families rose sharply (chart)--accounting for all the increased concentration of wealth in recent years.

That's not all. Although the new study does not analyze wealth shifts within the top 0.5% of families, economist Sidney L. Carroll of the University of Tennessee in Knoxville believes that even within this select group, the big gains were posted by relatively few people. "It's those at the very top of the top 1%--people with wealth in the tens and hundreds of millions of dollars--whose fortunes seem to have soared in the 1980s."

The key issue, though, is the impact of concentrated wealth on the economy. Carroll notes that such wealth tends to be passed on from generation to generation via trusts. "Whereas perhaps half of today's fortunes were created explosively by visionary entrepreneurs like Sam Walton or Bill Gates," he says, "the rest are mainly inherited wealth that has been invested conservatively."

The problem for the economy, says Carroll, lies not in first-generation fortunes, which are the result of inventive, risk-taking activities, but in inherited wealth. Recipients of massive inheritances, he observes, have little incentive to engage in the kind of creative entrepreneurship that built their family fortunes. Rather, he says, "the evidence suggests that people receiving windfalls through inheritances tend to reduce their labor force participation."

The solution, Carroll believes, is to develop a more economically productive way of taxing the transference of wealth. In a new book, How Rich Is Too Rich?, he and fellow author Herbert Inhaber suggest moving from estate taxation to inheritance taxation. Under their plan, taxes would no longer be levied on estates but on individual inheritances. Any individual could receive an inheritance of $1 million tax-free but would have to pay rising taxes on additional gifts and bequests so that the lifetime total would not exceed $2.5 million.

This scheme, argues Carroll, would hardly interfere with newly created wealth. Indeed, by spreading moderate wealth more widely, it would create incentives among young recipients to build their own fortunes. And over time, it would lessen the trend toward greater concentration resulting from perpetuated fortunes--a trend that stirs resentment among the great majority of Americans who were not born wealthy.

Although shifting to inheritance taxation would face resistance from the very wealthy, Carroll believes it would find favor among the moderately wealthy, who would actually be able to pass on more of their wealth on a tax-free basis. "Transferring more wealth to a broader-based crew of energetic, educated young people," he says, "could have a profoundly different effect on the economy than the many millions locked away in bequests to support the very rich."

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