Should we allow the wealthy to pass on large inheritances to their children and grandchildren?

After all, allowing one generation to transfer large sums of money to another seems to exacerbate the problem of inequality, allowing second and third generations to bask in wealth they really didn’t earn.

If we, at the very least, taxed the inheritance, we would curb the sting of elitism by redistributing it to other people who might need a leg up in this economy.

Or so the argument goes.

Put aside for the moment the question of whether we (whoever we are) are competent or authorized to pass our entire fortune on to our children and grandchildren, and consider what some unintended consequences of what redistributing an inheritance might be.

Here is an illuminating passage from F.A. Hayek’s The Constitution of Liberty:

It seems certain that among the many ways in which those who have gained power and influence might provide for their children, the bequest of a fortune is socially by far the cheapest. Without this outlet, these men would look for other ways of providing for their children, such as placing them in positions which might bring them the income and the prestige that a fortune would have done; and this would cause a waste of resources and an injustice much greater than is caused by the inheritance of property. Such is the case with all societies in which inheritance of property does not exist, including the Communist. Those who dislike the inequalities caused by inheritance should, therefore, recognize that men being what they are, it is the least of evils, even from their point of view.

Here, we see how Hayek is talking about what Thomas Sowell called “the constrained vision.” In plain language, that means we are merely confronted with trade-offs rather than an actual opportunity to solve a social problem like inequality.

Here’s why: People love their children and seek to provide them with as many advantages as possible. For some, this means particular character traits. For others, this means prestige, status, and material wealth.

Whether the latter is praiseworthy or blameworthy is beside the point if we are thinking about the advisability of inheritance taxes. It’s simply a reality, and it is a constraint we have to deal with if we are going to make effective policy.

As it happens, there are a lot of ways to secure the wealth and status of one’s children apart from simply passing down wealth.

  • Nepotism within the family firm is one way.
  • Working to curry favor with the powerful in order to see that one’s children find their way into elite universities or desirable internships is another.

The result of both would be an aristocracy of pull—one in which the achievements of the second generation look like they are greater than they actually are.

An inheritance is obviously “unearned” in an important sense and, I would think, the responsibility of stewardship would be clearer.

Working one’s way through elite institutions and elite internships looks more meritocratic but might be inefficient manifestations of Senior’s desire to secure Junior’s wealth and status.

Should we tax inheritances to solve inequality? Parents are going to find a way to provide for their children, either way.