Appendix 4 - Two Distinctions

It is important for the strength and survival of open democratic capitalist societies to keep in mind the distinction between the creation of income, savings and newly created wealth and the receipt of inheritance and capital gifts. The creation of income, savings and new wealth results from economic activity by recipients. Inequalities in income, savings and newly created wealth are necessary in order to encourage the creative forces of capitalism. The receipt of inheritance and capital gifts, on the other hand, results from lifetime and posthumous generosity on the part of others. It is entirely unrelated to economic activity by beneficiaries. Inequalities in inheritance and capital gifts are not necessary in the same way. They are not fair from the point of view of each new generation. To the extent that they fuel increasing inequalities unnecessarily they are a danger to the stability of open democracies.

This distinction is one which is all too often ignored by academics, commentators and politicians, as indeed by many others. In fact there has been effectively a taboo on the subject, which even if raised is dismissed quickly as insignificant, irrelevant or unimportant. It is, for example, a serious flaw in Professor John Rawls' influential book "The Theory of Justice", that he makes so little of it. Surely people who did not know what their position in the real world would be, would choose at least some inheritance for themselves - and therefore for everyone - in each succeeding generation as part of the framework for their society. Some, in choosing the framework of society, might prefer equal inheritance for all, at least in terms of non-human wealth. They might even prefer more inheritance of non-human wealth for those with fewer natural human advantages. But what happens in real life is the opposite. Unequal inheritance of non-human, material wealth tends to reinforce rather than compensate inequalities of human wealth, such as intelligence, social background, upbringing and education. So, at the very least, a universal minimum inheritance for everyone, paid back by taxation on further inheritance and capital gifts received from other sources, is a reasonable framework for society.

The second distinction is between the flow - or river - of income and expenditure and the stock - or lake at the source of the river- of capital. Redistribution by taxes and subsidies on the flow of income and expenditure, such as guaranteed income schemes, quickly reaches a limit set by the fact that many people with enough income without working will choose not to work. In a country with equality of incomes, there would be no incentive to work, so it would not be possible to combine such equality of incomes with capitalist democracy. But in a country in which all received the same stock of capital by way of inheritance or capital gifts, there would still be incentive to work. People would work to earn income and to create and to save capital for their old age in an uncertain world. Those already wealthy might take up spending rather than earning, but this would enable others to earn and save. So, in theory, at least, it is possible to imagine combining equality of inheritance and capital gifts with democratic capitalism - but for tax evasion.

In practice there is a democratic balance to be found. Spreading inheritance and capital gifts more widely would change the trend away from ever increasing inequality of opportunity within each new generation. The taxation of estates, gifts and inheritances should be changed in such a way that people's natural wish to pay less tax leads them voluntarily to spread their lifetime and posthumous generosity more widely than they would do otherwise. This is what a cumulative lifetime progressive Inheritance and Capital Gifts Receipts Tax does.

Thank you for reading to the end. Any comments - for or against - most welcome.