Thursday, March 31, 2011

"Inheritance Reduces Inequality"

Who says economists can't have fun? The author of this op-ed piece in Financial Post is probably Canadian. Maybe that helps.

William Watson's thesis: inheritance eases rather than exacerbates inequality.
The raw data on the pattern of who’s left money is not at all encouraging for egalitarians. Inheritances are both bigger and more common the higher you move up the income scale. They also go disproportionately to the more educated and to white Americans rather than Afro-Americans and Hispanics. ***

All that suggests inheritances can only make inequality worse. What turns this presumption around 180 degrees is that as a percentage of recipients’ net worth, inheritances are bigger at the bottom end than the top. Thus the average increase in net worth from receiving an inheritance is 66% for people making less than $15,000 a year (this time in 1998 dollars), but only 16% for people making at least $250,000 a year. Rich people do leave more total dollars to their kids (many of whom aren’t actually “kids” when the transfer takes place, but are in their 50s or even 60s), but the proportional effect isn’t as great. By causing this disproportionate boost at the bottom end, inheritance’s effect is equalizing.

No comments: