Whether it’s through Thomas Piketty’s latest book, the distributional effects of unconventional monetary policy or even the identification of the major economic problem by the latest intake of economics undergraduates, wealth and its unequal distribution remains a matter of enduring interest. Here Brian Nolan1 shows that the effect of intergenerational transfers of wealth in many richer countries tends to have an equalising effect, though this varies with the size of the transfer.
The importance of intergenerational wealth transfers
The distribution of wealth is of major concern for its potential economic, social and political impacts, with intergenerational wealth transfers in particular giving rise to a variety of normative and practical issues that loom large in current debates. Recent studies based on microdata have generally arrived at the, to many surprising, conclusion that inheritances are wealth-equalising. Boserup et al (2016) and Elinder et al (2018) find that inheritances reduce relative inequality measures such as the Gini coefficient and top shares, using data from tax records for Sweden and Denmark respectively. This is consistent with Wolff and Gittleman (2014) and Crawford and Hood (2016) based on analysis of household survey data for the US and Britain respectively.
These transfers are most often studied in their different national contexts. The aim of this study (Nolan et al, 2020) is instead to apply a comparative lens to household survey data on receipt of inheritances and gifts inter vivos in order to identify common patterns, see how current wealth levels of households are related to their past receipt of these transfers, and assess how much intergenerational transfers contribute to wealth inequality in different countries. In particular, the interest is in how Great Britain compares in these respects with six other rich countries — France, Germany, Ireland, Italy, Spain and the US.
The data come from specially designed large-scale household wealth surveys, which have become much more common in recent years and opened up this area for comparative research. These are the British Wealth and Assets Survey, the US Survey of Consumer Finances, and the Euro-zone Household Finances and Consumption Survey for the other countries, with data collected between 2010 and 2014. The Wealth and Assets Survey (WAS) covering Great Britain (but not Northern Ireland so not the entire UK) has been carried out by the Office for National Statistics since 2006. The surveys for the other countries are cross-sectional and include questions about inheritances and gifts received at any point in the past. WAS by contrast is longitudinal in design, and only the first wave asked about inheritances received at any point in the past with subsequent waves asking about receipts since the previous wave, complicating its use for current purposes. We concentrate on those in Wave 3 (2010-2012) who were also in Waves 1 and 2, aggregating reported receipts of transfers across these waves. Many missing values for amounts received as inheritances before Wave 1 had to be imputed, and in order to align with the comparator country surveys before-tax values were estimated from reported after-tax amounts, small gifts were excluded from the British data, and the household rather than individual is used as the unit of analysis. Marketable not pension wealth in used as the wealth concept.
Key features of wealth transfers in rich countries
About one-third of households reported receiving an intergenerational wealth transfer at some point in the past across most of the countries we studied, including Britain, but that figure was only 19 per cent in the US. The average aggregate amount received was consistently much higher than the median as very large receipts boosted the average. Most of the total value of transferred wealth was via inheritances rather than gifts in Britain, Ireland, Italy, Spain and the US, whereas for France and Germany about one-third of the total reported amount received was via gifts.
One would expect the receipt of inheritances and gifts to be strongly related to where individuals and their parents are in their life-cycles. We find some receipt to be quite common across the entire age distribution (except in the US where few aged under 35 report any), but the average transfer receipts are consistently lowest for the youngest age group so typically only about 5 per cent of transfers has been received by them. Those aged 65 or more have had the longest time to accumulate transfers and as Figure 1 illustrates they received the largest share of the total in Britain, Italy, the US and especially France, but the ‘middle-aged’ have done so in Germany and Spain.
The proportion reporting receipt generally rises with income, but the variation is often not so strong, and a substantial number of households in the bottom quarter and half of the income distribution have benefitted from transfers. Mean amounts received generally also rise as one moves up the income distribution, so households in the top current income quartile generally received 40- 50 per cent of total transfers compared with about 10-15 per cent for the bottom quartile (Figure 2).
Ranking households by current wealth rather than income level, the likelihood of having received an inheritance or gift was seen to increase rather consistently with wealth rank across these countries. About 56 per cent of those in the top quarter received an inheritance or gift in Britain compared with 15 per cent in the bottom quarter. In five of the six countries a substantial minority of those in the top 1 per cent reported no inheritance or gift receipt, and in the US only 39 per cent reported any such receipt. However, the average amount received generally also rises as one moves up the wealth distribution and is by far the largest for recipients in the top 1 per cent. Households in the top 1 per cent received as much as 18 per cent of the total amount transferred in in Germany and the US. By contrast, the share going to those in the bottom quarter of the current wealth distributed is generally very low indeed (Figure 3).
Who receives intergeneratonal transfers?
Probing the characteristics of those who had, versus had not, received intergenerational transfers and the varying amounts they received via regression, employing both two-stage and Poisson models, the estimation results show that age and level of education were strong predictors everywhere. Table 1 shows for example that for Britain, someone with a third-level qualification was 28 per cent more likely to have received some intergenerational transfer than someone with only lower secondary education, controlling for age and gender, a gap that was similar in France and Germany but modest in Spain. Analysing variation in amounts received among recipients, in Britain a recipient with a third-level qualification would be expected to have received 68 per cent more on average than one with only lower secondary schooling. This gap was even wider for France and especially the US.
Intergenerational transfers and household wealth
The influence of having received intergenerational transfers in the past on the household’s current level of wealth is critically important but very difficult to assess reliably. The average wealth of transfer recipients is much higher than that of non-recipients in all countries, with that gap being particularly wide in the US. The relationship between transfer receipt and owning one’s own house accounted for a substantial proportion of the difference, but financial and business wealth also played a major role for Britain and even more so in the US. When we control statistically for differences in age, education and household size the wealth gap between recipients and non-recipients narrows but remains substantial. In a separate analysis, having received some intergenerational inheritance or substantial gift in the past is associated with currently ranking a good deal higher in the wealth distribution, controlling for age and education, especially for recipients of the largest wealth transfers.
Intergenerational transfers and household wealth inequality
As well as the relationship between intergenerational transfers and current wealth levels for households, the influence that inheritances and gifts have on inequality in the overall distribution of wealth inequality is an even more tangled question. As noted earlier, some recent studies conclude that inheritance is equalising rather than dis-equalising, in essence because less wealthy heirs inherit amounts that are greater relative to their pre-inheritance wealth than more wealthy ones. However, rather than (implicitly) comparing with a situation where there were no wealth transfers, it may be more relevant to ask what the wealth distribution would look like if transfers were distributed differently, or if there were more or fewer transfers. That perspective underlies the analysis we implement employing (recentered) influence function (RIF) regression methods which capture how marginal changes in the distribution of covariates impact on distributive statistics. We apply these methods to calculate the effect that a marginal increase in the number of households in receipt of transfers would have on the overall shape of the wealth distribution, holding constant the wealth distributions conditional on the transfer.
The results of this analysis, illustrated in Figure 4, suggest that in most of the countries studied, having more transfer recipients and correspondingly fewer non-recipients, or more recipients of small or medium-sized transfers, would be expected to reduce wealth inequality modestly. This reflects the fact that those transfer recipients were more concentrated around the middle of the wealth distribution than non-recipients. In contrast, increasing the proportion of recipients of large transfers generally increased overall wealth inequality. These findings serve to reinforce the notion that the overall effect of intergenerational wealth transfers may be equalizing, but highlights a crucial heterogeneity in impact depending of the size of the transfers that has not been recognised in the previous research literature. This analysis is descriptive and static rather than attempting to identify causal or general equilibrium impacts, but is none the less informative.
Taxing intergenerational wealth transfers
The implications for policy, most obviously with respect to taxation of wealth transfers, are significant. The disequalizing impact of large transfers in terms of overall wealth inequality reinforces the notion that strengthening the capacity to effectively tax them has to be a key element in reforming capital transfer taxes. The wealth transfer tax systems in operation in the countries we studied vary widely, including with respect to whether they are levied on the estate of the deceased or the beneficiaries, how bequests versus gifts are treated, and how thresholds, allowances and exemptions function, over and above the more easily compared headline marginal rates of tax. It is difficult to detect clear impacts of differences in tax systems on the varying patterns of intergenerational transfers across countries given all the other differences between them, but some previous studies have linked changes in transfer behaviour over time to changes in tax treatment. The case for moving towards a lifetime capital acquisitions tax for gifts and inheritances can be convincingly made purely in terms of fairness and efficiency. While this also has the potential to reduce the role these transfers play in generating wealth inequality, this could be considerably enhanced if combined with direct wealth endowments to all young people along the lines proposed by Atkinson (2015), Milanovic (2019), and on the most ambitious scale by Piketty (2019).
1. Institute for New Economic Thinking, University of Oxford. The Nuffield Foundation funded the project, the views expressed are thoe of the authors
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