 |
| ||
Capitalism generates disparity. That is its primary function and purpose. It takes wealth from the many and concentrates it into the hands of a favoured few. Left unchecked, the wealth differential between rich and poor would accelerate rapidly to the point of social collapse. The protocol between man and man would degenerate into violence. Anarchy would reign. Some kind of negative feed-back is vital.
The kind of negative feed-back used is tax. Tax effects a partial redistribution of wealth back to the many. The extent to which it does so is large or small according to whether the government of the day leans more towards socialism or more towards capitalism. A socialist government purportedly tries to adjust the taxation rates to give everybody an income of dignity. A capitalist government tries to maintain them at no more than a hair's breadth above the threshold at which the poor would launch into universal insurrection.
There are two kinds of wealth. There is static wealth. There is dynamic wealth. Static wealth is essentially capital. Dynamic wealth is what capital generates. Capital wealth is like a machine: consumable wealth is analogous to what that machine produces. The machine is essentially permanent. It is solid. Its products are liquid. They circulate and re-cycle continually. The two things are fundamentally different. Strictly they should be measured in different units of measure or currency.
The mechanisms of capitalism can only directly concentrate or polarise dynamic wealth - its liquid or re-cycleable products. However, because (quite erroneously) both static and dynamic wealth are reckoned in the same currency, they can be inter-converted. Inter-converting static and dynamic wealth is systematically a nonsense. Nonetheless, it is done. The upshot is that thereby, capitalism is able to concentrate static wealth also.
To maintain socio-economic stability, it is vital to effect redistribution on both kinds of wealth. This necessitates two corresponding kinds of tax. Income tax and consumption tax are for the most part dynamic taxes. They tax dynamic wealth. The main tax for redistributing static wealth - capital and land - is Inheritance Tax. This, in effect, partially redistributes to the many, the accumulated wealth of a member of the favoured few, at his death. This means that he can pass on only a part of his capital to his descendants.
There is another kind of tax on capital called 'capital gains tax'. However, this confuses static (wealth generating) capital with stochastic accumulation of dynamic wealth. And, to my mind, it wreaks the kind of havoc one would expect from such confusion.
Occasionally, when a socially-responsible government gets into power, inheritance tax is raised. This causes a small portion of the wealth a rich person leaves at his death to be confiscated by the state. However, as soon as a capitalist government is returned to power, it reduces - or even dismantles - inheritance tax.
Inheritance tax normally only kicks in above a fairly high threshold. The middle-income majority is therefore generally unaffected by this kind of tax. If somebody in this sector of society inherits a share of the house and furniture of his parents, then that is all there is to it. Some austere socialist governments may levy some tax upon what they inherit, but this will generally be a very small fraction.
For the very poor and the unemployed, the situation is, however, very different indeed.
The law defines the amount that a poor person 'needs to live on'. If he has no income at all, then state welfare meets the whole of this need. However, if he already has a small income from another source, the amount of state welfare he is given is reduced so that it only just tops up his income to what 'the law says he needs to live on'.
Capital in excess of £3,000 is deemed to give rise to an income. If he has between £3,000 and £8,000 of capital, the amount of state welfare he receives diminishes from the full amount 'the law says he needs to live on', down to zero. Above £8,000, his capital is deemed to generate more than enough income for him to live on.
The amount of income £8,000 is deemed to generate is about one thousandth of what it would actually yield if I were to leave it sitting in my bank account. With careful investment I might squeeze out of it one hundredth of its deemed yield. The fact remains that it cannot possibly yield within an order of magnitude what it is deemed to yield. This means only one thing: the intent is that the poor person should live off their own capital until it drains down to £3,000 at which point full state welfare is reinstated.
This means that if a poor person, entirely dependent on state welfare, inherits cash or kind to a value in excess of £8,000, he immediately loses his entire income.
If I were to inherit £800,000 I would immediately start a successful business. I would have enough to live on (ie pay myself a proper salary) and to capitalise the business itself. If I were to inherit £80,000 I would have enough to live on for long enough to be able to find myself a good job. It would also finance the necessary facilities and travel I would need for this purpose. However, were I to inherit only £8,000 I could do nothing but live on it until it all drained away. It would be like a fire too small to support its own combustion.
However much I inherited, I would have to be very careful how quickly I spent it. This is because if I should ever have to go back onto state welfare, having come off it because I had inherited capital, I would have to have lived off that capital in the mean time at a rate not exceeding that of state welfare. Were I to spend it too quickly I would be deemed to have 'lived it up on my capital' on the assurance that I could fall back on state welfare after I had finished having my 'good time'. In this event, my state welfare would not be reinstated and I would end up destitute and homeless.
Were I to inherit enough to guarantee that I would never again have to fall back on state welfare, the above would not matter. However, should there be any chance that my capital and efforts would not ignite a successful business or guarantee me a permanent job, I could not risk spending it faster than the rate of state welfare.
Nevertheless, to launch a business, or to embark on a viable work-search programme, it would be necessary to spend my capital at a rate at least 5 times state welfare. With £800,000 I would take the risk. With £80,000 I would take the risk. With only £8,000, taking such a risk would be stupid. Anywhere below £30,000 it would not be workable.
This means that with less than about £40,000 of inherited capital, all one can do is live on it at a rate of spending equal to state welfare until it is all gone. Then sign on again. The purpose of this mechanism is clearly to keep the poor locked into poverty as a witness to those in work so that they will work all the more willingly for all the less reward.
A small proportion of the inheritance of the rich is confiscated by the state in order to prevent the excessive polarisation of capital wealth. Little if any is confiscated from the middle majority. However, the inheritance of the poor is confiscated in total. A poor man thus in no way benefits from his inheritance. It simply saves the state exchequer the need to pay him his minuscule amount of welfare for a while. It means, in effect, that those who have least are taxed the most. The inheritance of the poor is taxed at 100%. But of course, this is not called, or thought of, as inheritance tax.
In the early 1990s, the Prime Minister, John Major gave a speech which, rightly or wrongly, came across to me as follows. He proposed to abolish Inheritance Tax. This was to help fulfil his personal vision of a society with "wealth cascading down through the generations". In the absence of any other agent of capital redistribution, wealth would indeed then cascade down the generations - in ever increasing concentrations down fewer and fewer family lines; his own included, no doubt. A major aid to the further polarisation of wealth and opportunity. There is nothing to stop a government of the future implementing what I perceive him to have proposed.
There was once a perfectly fair, simple and systematic way of redistributing capital. But it did not indulge the greed of the mighty. So it was abandoned.