A subject not often talked about is inheritance, taxes, and wealth inequality. Until the mid-2000s, the net worth of households across the wealth distribution increased at roughly the same pace, that has changed after the Great Recession in 2008. The decade-long economic expansion has given the U.S. new wealth driven by a booming stock market and rising house prices. These two asset classes were treated differently (moral hazard) in terms of government help during this Great Recession. One could make the argument that much of the wealth gained by the top economic strata are ill-gotten gains – fraud of government manipulation. How?
Wealth for the top 50% of the economic strata has shown to be the winners. The higher up the economic strata, the better. The top 1% of households have more than twice as much as they did in 2003. More than 85% of the assets of the wealthiest 1% are in financial assets such as stocks, bonds, or stakes in private companies. Since assets of the top half have been mostly financial assets, and since the government via the Fed bailed out the economy overall, these assets recovered nicely.
Wealth for the bottom 50% of the economic strata has shown to be the losers. The bottom half of all U.S. households, as measured by wealth, have only recently regained the wealth lost in the 2007-2009 recession and still have 32% less wealth, adjusted for inflation, than in 2003. Slightly more than half of all assets owned by the bottom 50% of households come from real estate, such as the family home. Since the main assets of the bottom half were real estate, and since many of these folks lost everything – no bailout, it has been much harder to recover the loss.
What can we then say about inheritance and wealth inequality? A paper by Pirmin Fessler and Martin Schürz, both OeNB, was among the 2015 winners of the renowned Progressive Economy award presented at the Annual Progressive Economy Forum held at the European Parliament. The key message of the paper is that across all euro area countries (the principle would be the same in the U.S.), inheritance plays a decisive role in defining the relative position of households in the distribution of wealth.
Some would disagree, believing the ability to create wealth is not genetic. Perhaps true, but that’s the point. The next generation would not normally have wealth, except be it from inheritance. The other point to heritance is that family structures have changed dramatically in the last 50 years. The who that gets the inheritance can get muddled.
Here is the bottom line. Due to the moral hazard created in 2008, the push for socialism (seeking tax revenue), and the growing wealth inequality – inheritance tax is in the crosshairs of many tax authorities. It is already an issue by some of the Democratic candidates for president in 2020. Democratic presidential candidate Julian Castro introduced a plan to tax inheritance – there will be others.
News Forecasters forecasts that in the next 5 to 10 years, Americans (as well as many other countries) will be facing significantly more inheritance taxes in the future – driven by these economic realities and politics. Plan accordingly.
A video presentation of this subject: