In a recent article titled “Is property inheritance widening the wealth gap?” author James Gordon points out that people in Britain who own houses will often leave them to their adult children and, thus, adult children of Brits with no houses will see a large gap between their wealth and those of their housing-endowed peers.
To his credit, Gordon provides balance by citing American economist and occasional EconLog blogger Steve Horwitz:
“I don’t see inheritance being the game-changer that everyone thinks it is,” he [Horwitz] says. “With baby boomers living much longer, even if their sons and daughters are set for a bumper sum of money, many won’t receive it until they are in their mid-60s and by then they will be financially secure and won’t necessarily need it.
But Gordon misses two points.
First, he never asks why housing wealth in London and in other urban parts of England has grown so much. One can casually say that it’s because demand has grown so much, which is true. But if the supply of housing were relatively elastic, a growth in demand would not cause the large increases in housing prices that we’ve seen in London, coastal California, and coastal northeastern United States. Of course, I’m most familiar with the U.S. case, but the same kinds of restrictions on new housing that we see in the United States exist in London also.
Now it’s not quite fair for me to say Gordon misses this point because his article was, after all, written in a context where these restrictions exist and the probability that they will be substantially loosened is well below 0.5 and probably well below 0.3. It’s just that if he’s writing the article in the context of “what is to be done?”, certainly going to the root of the problem is important. If he isn’t concerned about the wider context, then my criticism is moot. Except that I think that someone who cares about this issue should care about the wider context.
Second, Gordon quotes, without questioning, an unlikely example to make the point about how those who get only wages, and no inherited wealth, will fall behind. Referring to George Bangham, a research and policy analyst with the Resolution Foundation, Gordon writes:
Mr Bangham notes that a person earning the minimum wage all their working life would earn around £750,000 over a 50-year period. But, he says, from next April “it will be possible to inherit more than a million pounds of property from your parents, free from inheritance tax”.
Almost no one who earns the minimum wage does so over his whole working life. The hourly minimum wage in Britain for those age 25 and over is 8.21 pounds ($10.08 in U.S. dollars.) Simply being in the labor force for a steady 5 years (and usually fewer than 5 years) typically puts you at a wage substantially above the minimum.
READER COMMENTS
Alan Goldhammer
Sep 7 2019 at 1:56pm
One cause of ‘inequality’ regarding inherited wealth is escape from capital gains. Equities transferred to heir(s) reset the price for calculation of capital gains to the date of transfer and the asset appreciation during the deceased’s holding period is not captured. Personally, I think this is bad tax policy.
Thaomas
Sep 7 2019 at 2:38pm
Two points:
Should capital gains be taxed at all? Yes if we have a progressive income tax, No if we have progressive consumption tax
Should nominal capital gains be taxed? No, they should be indexed.
robc
Sep 9 2019 at 12:01pm
I would prefer 2 things:
Eliminate the inheritance tax.
Heirs inherit the initial costs for capital gains purposes.
(And a 3rd would be getting rid of the capital gains tax, making the 2nd moot).
Mark Brady
Sep 8 2019 at 1:26am
Questions for David.
“First, he never asks why housing wealth in London and in other urban parts of London has grown so much.”
This doesn’t make a lot of sense. Do you mean “other urban parts of the UK”? If you do, be advised that house prices outside of major towns have also risen. That said, there has been and continues to be a considerable regional variation among house prices, all of which have risen in recent years.
“It’s just that if he’s writing the article in the context of “what is to be done?”, certainly going to the root of the problem is important.”
More to the point, he is not writing the article in the context of what could be done irrespective of political feasibility, which, I suggest, seems to be what you are proposing. Given zoning and other constraints, his argument is, at least at first reading, plausible. I don’t think it’s fair to say that he doesn’t care about the wider context. We don’t know. Perhaps we should ask him.
“Almost no one who earns the minimum wage does so over his whole working life. The hourly minimum wage in Britain for those age 25 and over is 8.21 pounds ($10.08 in U.S. dollars.) Simply being in the labor force for a steady 5 years (and usually fewer than 5 years) typically puts you at a wage substantially above the minimum.”
But for some it doesn’t. And if we’re talking about 50 years of work, say, 15-65, from 1969-2019, the total value of the lowest wage rate would be a lot less than £750,000. (The school leaving age was 15 in 1969. And the minimum wage was introduced in 1998, so for nearly thirty years, for goos or for ill, there was no government-enforced minimum wage.)
David Henderson
Sep 8 2019 at 2:18pm
You wrote:
Do you mean “other urban parts of the UK”?
Yes, I do. I’ll make the correction.
You wrote:
Given zoning and other constraints, his argument is, at least at first reading, plausible.
True, which is why my criticism on that point was relatively gentle.
You wrote:
And if we’re talking about 50 years of work, say, 15-65, from 1969-2019, the total value of the lowest wage rate would be a lot less than £750,000.
True, but again, my point is that the number of people working at a very low wage for 50 years would be a tiny percent of the labor force.
But for some it doesn’t.
True, but I allowed for that by saying “almost no one.” I suspect that of people working for 50 years, well below 4% and probably below 1% are working at minimum wage the whole time. That’s what I meant by “almost no one,” but I should have been clearer.
You wrote:
And if we’re talking about 50 years of work, say, 15-65, from 1969-2019, the total value of the lowest wage rate would be a lot less than £750,000.
True, but remember my point. As you well know, given that you’re a first-rate economist (I’ve heard glowing reports from many of your students you taught at my school), very few people work their whole lives at at the low end of the wage scale.
You wrote:
And the minimum wage was introduced in 1998, so for nearly thirty years, for goos [sic] or for ill, there was no government-enforced minimum wage.)
True, but that in no way undercuts my point. The driver of real wage growth is not minimum wage laws, as you well know.
Mark Brady
Sep 8 2019 at 1:40am
Another consideration is the way in which UK Inheritance Tax is reduced for children and grandchildren in respect of the primary residence. See the third paragraph below.
Passing on a home
You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.
If you leave the home to another person in your will, it counts towards the value of the estate.
If you own your home (or a share in it) your tax-free threshold can increase to £475,000 if:
you leave it to your children (including adopted, foster or stepchildren) or grandchildren
your estate is worth less than £2 million
https://www.gov.uk/inheritance-tax/passing-on-home
Dylan
Sep 8 2019 at 8:27am
I’ve got two points of my own, on your last two points.
First, the personal one. My wife has been working since she was 14 years old. i met her on a job where she was nominally my boss, so I know that she is not only an incredibly hard worker, but also an efficient one who gets things done much quicker than most of her peers (and certainly me). Yet, she’s only very rarely had a job that pays more than a dollar or two over minimum wage. Worse, she’s had trouble finding and keeping those jobs, so she hasn’t had steady paying work most of that time. To make up the gaps she has done freelance work and odd jobs, as well as started her own business about 15 years ago. Most weeks she works 6 or 7 days a week on her business, and many times is working a part time job for 20-30 hours a week on top of that. The hours she puts into her business have almost certainly been compensated well under our local minimum wage. On the present course (and we’re both closer to the end of our careers, than the beginning) she will have made significantly less than Gordon’s example minimum wage case over the course of her working life. If this was an isolated example, than fine, she’s just been unlucky or bad at her job or whatever, but I don’t think that’s the case at all. I certainly have many friends that don’t seem to be doing better than her, and friends who have started companies and work all the time, only to barely make any money.
Second point, the example that Gordon uses is illustrative and helps put things in context of how does a million pounds relate to the minimum wage. Sure, he could have probably looked up some lifetime earnings data for the bottom 1% or 10% or whatever, and that might have been better…but this quick example I think does a decent job of illustrating the point he’s trying to make.
David Henderson
Sep 8 2019 at 2:22pm
Thanks, Dylan. What’s the minimum wage in your state?
Dylan
Sep 8 2019 at 5:22pm
We’re in NYC, so minimum wage here is now $15. She had a mostly full time job for 6 months last year, but lost it about a month after the new minimum wage went into effect. They fired the two people they had that actually made the product that they were selling, but kept the office manager, and someone who does social media marketing. They are using unpaid student interns for production.
That seems to be pretty common here in a lot of industries. I’m going through my own job search, and one of the places I looked at was a tech incubator for an intern position. I found out that he has between 8 and 10 unpaid intern positions normally, but zero paid employees.
Dylan
Sep 8 2019 at 5:28pm
I should note that we haven’t always been in NYC, and we both met when we had jobs that paid half of the NYC minimum wage. She has an AA degree in design, and when she graduated with that she had a salary position doing that work for about 8 months, but the owner of the company was a fraud who went to jail and the company folded at Christmas owing everyone a couple of months of back pay. She tried to get another job in the field, but it was a recession and she needed something quick, so ended up going from one minimum wage job to the next.
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