The Lottery You Were Born Into – The Ethics of Inheritance

From the article:

You did nothing to earn your parents' money. Is that a problem?

In 1973, the Vanderbilt family held a reunion at Vanderbilt University. Roughly eighty descendants of Cornelius Vanderbilt showed up, along with their spouses. Cornelius had been, at the time of his death in 1877, the richest person in America, with a fortune of roughly $100 million, an almost unimaginable sum for the era. His son William doubled it. A famous story about that reunion holds that not a single one of the Vanderbilts present was a millionaire. Whether or not the anecdote is literally true, the larger point is not in dispute: the original fortune did not survive intact across the family.

The usual telling of the Vanderbilt story is a morality tale about profligate spending: the mansions on Fifth Avenue, the “summer cottages” in Newport that cost more than some European palaces, the parties and the yachts and the thoroughbred horses. But consider a different moral. The Vanderbilt fortune didn’t just evaporate because of bad spending habits. It also fragmented across generations of heirs who didn’t build it, didn’t fully understand it, and had no particular reason to be good stewards of it. Many inherited fortunes face this fate, though others harden into dynasties. William Kissam Vanderbilt, one of Cornelius’s great-grandsons, put it this way: “Inherited wealth is a real handicap to happiness. It has left me with nothing to hope for, with nothing definite to seek or strive for.”

In 2023, UBS published its annual Billionaire Ambitions Report, and for the first time in the nine years the report had been published, new billionaires inherited more wealth ($150.8 billion, across 53 heirs) than was created by self-made billionaires ($140.7 billion, across 84 entrepreneurs). That's not a typo: 53 people who were born into the right families acquired more aggregate wealth than 84 people who built businesses. UBS projects that over the next two to three decades, more than a thousand billionaires will pass roughly $5.2 trillion to their children. If you find that number alarming, you are not alone. If you find it perfectly acceptable because those parents earned the money and should be free to leave it to whomever they choose, you are also not alone. The disagreement runs deep.

Here is the core progressive argument: from the heir's point of view, inheriting wealth is morally indistinguishable from winning a lottery. You did nothing to earn it. You did not choose your parents. You did not work for the money. It arrived in your bank account because of facts about your birth that were entirely outside your control.

One conservative argument that does not work, or at least does not work the way it's usually presented, is the "double taxation" objection: the claim that estate or inheritance taxes are unjust because the money was already taxed when the donor earned it. This sounds intuitive. It isn't. Many taxes fall on uses or transfers of already-taxed income. When you spend your after-tax salary at a store, you pay sales tax. When you invest it and earn returns, you pay capital gains tax. Nobody calls sales tax "double taxation" in a way that's meant to undermine its legitimacy. The reason the "double taxation" framing persists for inheritance is that it confuses two different taxpayers: the donor, who paid income tax on money they earned, and the heir, who didn't earn it at all. An inheritance tax on the recipient is straightforwardly a first tax on the heir's accession of wealth. It is no more "double taxation" than my income tax is double taxation because my employer already paid corporate tax on the revenue that funds my salary.

The evidence, taken together, says this: large inheritances can reduce labor supply, can sometimes relax capital constraints for entrepreneurship, and can help entrench inequality and dynastic advantage across generations. Carnegie understood the first of those effects well enough to give away 90% of his fortune. The Vanderbilts illustrated it by losing theirs. A well-designed inheritance tax isn't theft or punishment or class warfare. It is, if we take equal opportunity seriously, the bare minimum.