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What to do about intergenerational wealth inequality
If accumulated wealth passed down to family members is not adequately taxed, wealth inequalities will only worsen, making upward mobility a false promise, reducing household demand, inhibiting incentives to invest in human capital and ultimately choking off economic growth. (Pexels photo)
By Michael M. Atkinson, Haizhen Mou, Policy Options
The Liberal government called this spring’s federal budget “fairness for every generation,” claiming it would help “restore fairness” to millennials and Gen Z by reducing the costs of housing and education, as well as increasing the tax rate on capital gains of more than $250,000.
Heeding the economic well-being of younger generations is long overdue, but raising taxes on capital-gains earnings will do little to solve the gaping inequality of wealth distribution that is becoming a threat to Canada’s economic and cultural stability.
Years of galloping housing costs outstripping income growth have left more and more working Canadian families struggling to afford a place to live.
To achieve a course correction for Canada’s troubling prosperity gap, governments must escape the trap of notions from a different era. They need to study and consider policy directions that were once seen as radical or unorthodox but increasingly look like strategic options in a narrowing field.
For our recently published book, Fiscal Choices: Canada after the Pandemic, we interviewed more than 70 politicians, bureaucrats and economists about income and wealth inequality. Every one of them expressed concern about the disparity, but no one had any convincing suggestions about the right policy response.
For many policy-makers, the default solution for bringing fiscal stability to more Canadians is to have strong economic growth with low interest rates. But apart from the difficulties of achieving such an agreeable formula, there is no guarantee that inequalities would be any less pronounced if that were to occur.
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Despite various governments’ efforts to improve income redistribution, inequalities in Canadian incomes and wealth have typically only worsened during previous periods of non-inflationary growth.
Policy, however, does work. The child tax credit has made great inroads in reducing child poverty, while $10-a-day child care promises to help families increase their household income.
Unfortunately, these kinds of programs, combined with a progressive tax system, have done little to stem the rise of income inequality, specifically when it comes to tempering the share of wealth that goes to the very top of the income pyramid.
As it begins to dawn on people that redistribution schemes cannot address the disadvantages faced by those without inherited wealth, attention has shifted to wealth inequalities even though wealth is more equally distributed now than it was a century ago.
Wealth is measured in terms of net worth: financial and non-financial assets minus total liabilities.
The problem for younger generations is that asset prices have soared. Most people’s wealth is wrapped up in their homes and pensions. Because of rising housing prices, many new entrants to the labour force cannot attain the income level required for buying a home.
Not that younger generations are necessarily poor. In 2016, after adjusting for inflation, the millennial and Gen Z cohorts (ages 12 to 43) had a higher median disposable income ($44,093) than older generations when they were in that age bracket ($33,276 for Gen-Xers and $33,350 for boomers), according to Statistics Canada.
The reason? Younger generations today are working in an era of labour shortage, which puts upward pressure on wages. But despite having higher inflation-adjusted incomes than their parents at the same age, young people cannot expect to close the wealth gap.
What Canadian youth are experiencing is an effect of a self-reinforcing cycle of capital accumulation. Thomas Piketty’s 2014 book Capital in the Twenty-first Century argues that as long as returns to investment income are greater than the rate of economic growth, they will outpace growth in wage income. This pattern may not be inevitable, but evidence suggests it is unrelenting.
If accumulated wealth passed down to family members is not adequately taxed, wealth inequalities will only worsen, making upward mobility a false promise, reducing household demand, inhibiting incentives to invest in human capital and ultimately choking off economic growth.
Politically, gross inequalities threaten the liberal ideal of politically free and equal citizens co-operating in the solution of shared problems.
For these reasons, we asked policy-makers how they would feel about such unconventional policy approaches as a wealth tax or a universal basic income (UBI).
A wealth tax attacks wealth inequality directly, rooted in the idea that redistribution is the key to ameliorating inequalities.
A universal basic income, on the other hand, is more of a predistribution strategy, an income that is paid unconditionally to everyone, without any means test or work requirement.
Wealth taxes have well-known problems. By taxing wealth that was already taxed as income, they offend a basic principle of a capitalist economy: the supposed sanctity of property rights. As well, some critics claim that wealth taxes discourage investment or prompt capital flight and therefore don’t actually raise much revenue.
Collecting data on wealth is difficult and subject to efforts to exempt certain categories such as primary residences. For these and related reasons, the members of Canada’s economic elite whom we interviewed expressed little enthusiasm for slapping a wealth tax on selected asset classes.
UBI policy, meantime, has been attracting growing interest in the past several years. While scholars have examined the social and economic implications of this approach, critics are concerned with its costs and the fate of other, targeted programs whose recipients could end up with less support than now.
Proponents also face the task of explaining why people disengaged from the labour market deserve the support of those who are fully committed. Again, our Fiscal Choices interviewees – all experienced economic-policy practitioners – expressed little enthusiasm for what would be a vast overhaul and reimagining of social policy.
But if the future is one in which returns to capital continue to outstrip returns to wage labour, skeptics may have little choice but to confront the need for both predistribution as well as redistribution.
This shift is already under way and has been ever since human capital investment claimed a place in the logic of social policy.
Rather than concentrating exclusively on reducing income inequalities, Canada and other Organization for Economic Co-operation and Development (OECD) countries have already been expanding investment in public goods, particularly education, that are designed to stop gross inequalities from emerging in the first place.
That all sounds good, but if Piketty and his followers are right, something more than increases in human capital investment will be required.
Assuming that artificial intelligence will wreak havoc on opportunities for people to support themselves through full-time employment, the right to income will need to be divorced from returns to wage labour to avoid immiserating those without adequate capital.
Long before that point, however, governments will need to think through a predistribution strategy that extends beyond social investments and full employment into the realm of property rights and capital endowments.
Piketty has suggested providing every individual on their 25th birthday with an endowment of 120,000 euros (slightly more than $175,000). That’s the equivalent of 60 per cent of the average adult’s net worth.
This grant would be financed by taxes on inheritance and net wealth. Piketty calls this system “inheritance for all,” whose goal is to level the playing field of wealth creation and accumulation.
How recipients spend that money is their choice: paying for higher education and training, starting a company, buying a home. The goal is to encourage property and assets to change hands between generations, promoting both economic equality and a more efficient capital market.
Rather than framing inequality as a problem of redistribution in the here and now, a predistribution approach focuses on launching a lifetime of investment in a competitive knowledge economy.
There are formidable objections to this kind of scheme, much like the objections to UBI and wealth taxes. Cost, implementation and justification are serious challenges.
But as long as we work within a capitalist economy where the owners of capital can claim an expanding portion of the economic pie while others have a shrinking share, consideration of predistribution strategies is unavoidable.
If it is possible to justify CEO salaries that are hundreds of times larger than those of average employees, it should be possible to justify providing a publicly funded endowment to those who are otherwise inheriting a deeply unequal system.
This article first appeared on Policy Options and is republished here under a Creative Commons license.
