When will the US resolve prosperity inequality?

Wealth and distribution : "Inequality has disastrous consequences"

Mr. Beckert, you have been complaining about growing social inequality and the divergent distribution of wealth for years. Was that also the reason for the outcome of the Brexit referendum in Great Britain in June?

If you look at the regional distribution of votes, that's probably how it was. In the north of England, which voted with a clear majority in favor of leaving the EU, a large part of the population is socially dependent or at least feels left behind by the rich south. These people are obviously no longer willing to believe in the promise of better economic development through European integration and globalization. If a region or a group is left too far behind in society, there can be backlashes. Inequality can then have disastrous political and economic consequences. In this respect, it is imperative not to let social inequality get out of hand in a democratic society, as is the case in Great Britain.

What does growing inequality lead to?

The danger is the division of society through processes of social isolation. There are then groups that have completely different life experiences, are hardly exposed to normal life risks, and are offered completely different life opportunities than the rest of the population. This is initially a moral problem, but it is also a problem for a democracy when the uppermost class, which is well cared for and thus, to a certain extent, decoupled from the market, loses interest in its own society. Greece is a good example of this, where the elites are no longer interested in their own country and are investing their assets in London and Geneva. On the other hand, large parts of the population no longer see how their interests can get a voice in the established political process. This can currently be observed in the USA, but also in many European countries.

What does this mean for economic development?

Inequality slows economic growth when the economic potential of a society is no longer exploited, for example because the lower class of the population is no longer able to invest enough in their own education or to produce sufficient demand.

But economic wealth has increased, here, in Europe, in the USA ...

The increase in wealth did not take place in the broad middle class, not even in the upper middle class, but only in the upper class of the really wealthy. More wealth and more social inequality go hand in hand. When we talk about the wealth growth that has occurred over the last two or three decades, we are not talking about the middle of society, but about the rich. I don't mean primarily the top ten percent, but the top one percent, or even 0.1 percent. If you want to address wealth inequality, you have to approach great wealth.

Which way?

One would have to start at several points. Inheritance tax would be one instrument, wealth tax another option. And if you consider where this strong concentration of wealth comes from, then you have to approach capital gains tax, because wealth is created to a large extent through capital investments. I wonder why investment income in Germany is only taxed at 25 percent and thus half the amount of the upper income tax rate? But it is not just about taxation, but also about the development of incomes. We have had stagnating real incomes among the broader population since the 1990s; that has only changed somewhat in recent years. The concentration of wealth is also related to this wage development. If you really wanted to tackle the immense concentration of assets, you would have to turn all of these adjusting screws.

The inheritance tax is currently being reformed. A laborious process, the draft hangs in the mediation committee of the Bundestag and Bundesrat. It is a small tax, it only brings about five billion euros a year because of the tax exemptions and benefits. It is seen by entrepreneurs as a stupid tax that only pays if you are not careful and do not have a good legal advisor. Is there really much to be gained there?

In principle, yes, because around 200 billion euros are inherited every year in Germany. In fact, the tax revenue was never high. Even the SPD has never fought for this tax, because it has always caused great resistance in the bourgeoisie. For the parties, including the SPD, it is ultimately of secondary importance where the income comes from, and so there has been more emphasis on other types of tax, especially income tax and sales tax. There is less political opposition to these taxes.

In the USA it seems to be a little different, there people talk differently about inheritance tax.

In Germany, politics tends to follow the line that tax revenues are there to correct unjust market results through the welfare state. In America, since the 19th century, it was less about the correction of social inequality by the state than about equal opportunities in society. This is where the inheritance tax comes into focus.

Are Americans, of all people, more open to social justice than Germans?

It is about the fairness of the initial conditions. According to the idea, everyone should run onto the field with the same starting opportunities. What one makes of it is seen as less of a problem - here inequality is much more accepted. In Germany, on the other hand, it is the other way around: unequal starting opportunities are more likely to be accepted, but afterwards care is taken to correct inequality in society.

Is that the difference between a society that comes from the authoritarian state and is still shaped by it, and a society that has freed itself from it?

Yes, that is certainly a background. Inheritance is much more natural in a society that has developed out of feudal relationships than in a society that puts the individual in the foreground and defines itself through equal rights and opportunities. Inequality through inheritance is seen much more as a problem. You can see this to this day in the fact that the super-rich like Warren Buffett or George Soros do not problematize their own wealth, but rather the transfer of this wealth to their own family. It's a tradition in the US that goes back to rich entrepreneurs like Carnegie and Rockefeller: Getting rich is fine, but you give your wealth back to society through philanthropic foundations. Of course, there is an elitist element in it: whoever created the wealth also determines the purposes for which it is used. This also shows this difference: in the USA it is the social entrepreneurial elite who want to determine how the money they have created is distributed back into society, while in Europe it is more the state elite who make this claim.

But just then this state elite should have an interest in an inheritance tax with high yields.

This is countered by a phenomenon that is quite remarkable: the inheritance tax is unpopular among the population in Germany. Surveys show this again and again. 60 percent of those surveyed don't want it. Only the most important inheritances are actually affected by inheritance tax, which is due to the high tax exemptions. In this respect, it would be the tax that should actually be accepted by the majority of the population because it is not affected at all. But surprisingly, a majority is against inheritance tax - on the other hand, they accept a relatively high income tax, which is broadly more burdensome than an inheritance tax.

How do you explain that?

One reason is that there is often a misconception among the population about who is subject to inheritance tax and who is not. Business lobbyists also like to paint the picture that taxes are destroying jobs, for which there is no evidence whatsoever. Obviously, however, the argument gets stuck, as the current debate shows again. Another point: Somehow people have the idea that at some point they will get into the situation of inheriting or bequeathing large sums of money. This is usually unrealistic, but there is this fantasy that one could belong to the rich oneself and then would not want to share this wealth with the state. It's kind of an illusion of possibility.

Does it play a role that here in Germany, too, people think less individually and more from the family perspective?

That's right. There are clear differences from the American view of what inheritances are. In Germany, inheritance has always been seen essentially as a family matter; the inheritance process is viewed as a transfer of assets to the next generation of trustees. It is not a transfer of ownership between two individuals, but a generation change within the clan.

And why does such an attitude not change over time?

Ultimately, this continues from generation to generation because it has also been codified in the legal system and is repeated over and over again in political discussions. Every new generation of students learns this from their teachers and passes it on like this: inheritance is a family matter. In the families who have been wealthy for generations, it is seen that way anyway. Such cultural thought patterns are extremely stable and do not simply dissolve. This also shapes the current debate on inheritance tax.

As a result, those who regard inheritance as undeserved income have to live with the accusation that they only want to expropriate the wealthy.

Exactly. Because this view of inheritance as undeserved income, for which nothing was actually done, which is solely due to the parentage, is at odds with the traditional view.

As an alternative to the previous system - high rates, many exceptions - there is increasing demand for a flat tax solution, i.e. an inheritance tax with a low tax rate and few benefits. Many economists advocate it, the Greens want it, and there are supporters in the Union and the SPD as well. But does the advance have a chance in the face of this traditional fixation?

That should at least be discussed seriously, because it offers the chance that inheritances from company assets will be burdened at least a little more and we will move closer to the equal treatment of types of assets in inheritance tax. If you compare such a simple model with the draft law that is in the mediation committee, with these nightmarishly complicated evaluation rules, then this would be an additional argument. But you also have to know that a flat tax would mean giving up the goal of reducing wealth inequality through inheritance tax. The chances of political enforcement are also poor, because the companies would also oppose it because they would have to pay more than under the current rules.

The family entrepreneurs would scream and scream ...

An expert opinion by the advisory board at the Federal Ministry of Finance from 2012 shows from an economic point of view that companies are not endangered by such an inheritance tax. There are functioning financial markets. A company represents a value that can be borrowed from. Businesses can take out loans to pay taxes. From an economic point of view, all of this is much less problematic than the lobby of those concerned presents. Especially since you have to consider that inheriting companies themselves can be problematic because the heirs, usually the children, are not necessarily suitable for managing the company. Of course, from an economic point of view, it is a problem if company leaders are not selected on the market.

What is your suggestion?

I mean, inheritance should be viewed as another type of income and included in income tax. So burden with the normal income tax rates up to 45 percent. If we really see ourselves as a performance society, then we should tax inheritances at least as high as work. The income from this could be used to reduce income tax rates. This then helps those who inherit little or no inheritance. Of course there would have to be deferral regulations. The tax exemption would be 60,000 euros.

Isn't that a little bit in view of 500,000 euros for spouses and life partners or 200,000 euros for grandchildren in the previous law?

Two thirds of the inheritances are below this amount. The lower half of the population has no wealth whatsoever to inherit. Inheritances in the millions do not accrue to more than one percent of the population. We usually have no idea how unevenly wealth is distributed in our society.

Jens Beckert (49) is a sociologist, researches capitalism and heads the renowned Max Planck Institute for Social Research in Cologne. In the USA he was visiting scholar at Princeton, Harvard and at Cornell University. Since 2010 he has been a member of the Berlin-Brandenburg Academy of Sciences.

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