“And when human politicians choose between the next election and the next generation, it’s clear what usually happens.”
Warren Buffett
December’s General Election may see the largest ever generational divide, notwithstanding McDonnell’s stated intention to load huge amounts of additional National Debt on the shoulders of future generations. Politicians have clearly not read David Willett’s book ‘The Pinch’: if they had, we would no longer be making young people start adult life with a great burden of student debt, and there would be more radical initiatives to enable home ownership for the young.
The only way to build permanent public support for capitalism is to enable young people to see personally the opportunities it brings for them. So, following on our review of the CPS booklet on Popular Capitalism last week, we look at how to achieve inter-generational re-balancing through the levy on inheritance – Popular Inheritance.
Capitalism has some great virtues: it promotes enterprise, thrives on individual freedom, encourages innovation, and spreads economic growth across the world.
It has two major flaws, however - both related to its tendency to concentrate wealth and power. One of these flaws is a handicap which needs to be harnessed by an appropriate regulatory and fiscal structure: the ever-present magnet pulling towards excessive intermediation. It’s not the purpose of this commentary to address this, but it’s why HM Treasury needs to establish a working party to tackle one of the key reasons why ‘the many’ feel disenfranchised by ‘the few’.
Capitalism’s other flaw is the inter-generational impact of wealth inheritance. To quote the 2015 Ariadne Forecast for European Social Change and Human Rights Funders: “This is not just about including young people in driving future change, but also recognizing that they have significantly impaired financial prospects compared to their elders. There needs to be new political settlements around inheritance, tax, pensions and state provision of care”.
As successful families accumulate wealth, they naturally wish to give their young the best possible start in life. We should not seek to restrain this completely natural motive, but history shows us that, acting alone, it leads to huge wealth and social disparity. We therefore need that new political settlement around inheritance: to re-direct the destination of the existing levy on inheritance.
So, if you believe - as I do - that all new-born humans are endowed with the same mix of potential regardless of their social status, ethnicity or ancestry, there should be an egalitarian ratchet which acts to ‘level up’ by giving hope and opportunity to others; not designed to deny the opportunity for families to provide benefit to their own children or grandchildren, but rather a proper deployment of the inheritance levy, the proceeds of which are currently absorbed into current public expenditure as IHT (Inheritance Tax).
Each year, over £5 billion is paid as inheritance tax. Each year approximately 120,000 young people in families in receipt of Child Tax Credit (the poorest 17%) turn 18. In raw terms, that averages just over £40,000 per young person.
However, history also shows us that raw wealth distribution doesn’t work as a means of empowerment. It may give socialists a warm glow of justification, but at best it’s ‘give a person a fish, and you feed him/her for a week’; at worst it distorts judgement and removes the will to succeed.
As Muhammad Yunus discovered when he was developing the principles of micro-finance, you need to build a sense of accountability and purpose as an integral part of financing individuals to achieve their potential. In short, popular inheritance works best when it is earned.
Meanwhile young people need to have a structured way of receiving their earned share of that inheritance. In the United Kingdom, we are fortunate to have that vehicle: for those aged 9 to 17, the Child Trust Fund was provided as individual accounts to everyone born between 1st September 2002 and 2nd January 2011 – and, for young people in care, this continued in the form of the Junior ISA for looked-after children.
The best way to structure the earning of popular inheritance is in building life skills in preparation for adulthood. Financial education is conspicuous by its absence in most schools: only 25% of students leave school feeling confident about their financial awareness preparation.
So the earnings model should be based on a series of steps taken to build life skills, and their progress would be recognised via incentivised learning: inheritance credits being paid into their Child Trust Fund/ Junior ISA for each step achieved.
The Share Foundation, the registered charity which runs the Child Trust Fund/Junior ISA schemes for looked-after children on behalf of the Department for Education, already has such an incentivised learning programme in place, called ‘Stepladder Plus’. It has been in operation in selected local authorities across the UK, where funding for the incentives has been secured. Work is underway at present to demonstrate its effectiveness in helping care leavers to avoid becoming NEET (Not in Education, Employment, or Training), so that social investment can be raised to fund its wider distribution.
But this concept could be applied to a much wider cohort of disadvantaged young people. Let’s say, for example, that the Stepladder Plus structure were to be applied to each of those 120,000 young people approaching adulthood in Child Tax Credit families. The maximum incentive for looked-after children is currently just £1,500, so that would use up just £180 million out of the £5 billion inheritance levy each year.
Of course, £1,500 is not much of a capital starter for adult life: it hardly covers the cost of getting a driving licence, let alone the annual insurance cost of a car for a young person. So the amounts need to be higher, and the reach of the Popular Inheritance scheme, wider: but it does illustrate what could be achieved.
And, of course, it will take time for Popular Inheritance to make its impact felt; but I would suggest that it’s better to travel steadily than rush a change which should outlast any politician’s parliamentary term. This inter-generational ratchet, for ensuring the stability of capitalism by keeping it egalitarian in character, needs to be deeply embedded - as deeply embedded as the National Health Service.
One final point: an element of hypothecation is clearly helpful to enable those who pay inheritance levy to see the opportunities they are giving to large numbers of disadvantaged young people. In order to build this association still closer, I would recommend that an advisory group be established with a significant representation of these inheritance levy providers, in order to enable them to help shape its detailed operation: as indeed they would for their own descendants.
Gavin Oldham OBE
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