Tuesday, October 02, 2007

Family Matters

For all the talk of the death of socialism, there is one social unit that remains as socialist as ever: the family. Husbands subsidise wives (and vice versa); siblings lend each other help and money when profit-motivated organisations such as banks refuse; parents try to help out the weakest child in the hopes of achieving equality among their children despite varying ability or effort; the black sheep gets bailed out in circumstances they wouldn't be if their situation was objectively assessed.

The tradition of family socialism goes back millenia, probably to when homo sapiens first appeared, and there was good reason for it - it was a way of ensuring that the old, the sick and the weak were taken care of.

More recently, we've had the phenomenon of perfectly healthy able-bodied people relying on their wealthy parents to subsidise their standard of living - something that was characterised as "Economic Outpatient Care" by American professors Thomas Stanley and William Danko in their book The Millionaire Next Door. It can be simple (and beneficial) starter help such as parents paying for university or helping their children to buy a home with the gift of a deposit, or the more destructive version where adult children live expensively and run up debt in the belief that inheritance from their parents will clear it.

Stanley and Danko observed that too much help from parents weakens the ability of their off-spring to cope when the parents pass away, as by then they are too old to learn how to survive on their own. The annals of the rich are full of stories of the next generation unhappily frittering away their wealth through dissipation and lack of drive. Indeed this was what motivated Bill Gates to decide to give away most of his money - he didn't want to weaken his children by removing their motivation. The best parents are the ones who push their children out of their nest and force them to stand on their own two feet, and the earlier they do this the better, as the parent is still around to watch progress, offer advice and if the child stumbles really badly, pick them up: what usually happens in these circumstances is that the young adult struggles mightily at first, and then gets the hang of it and begins to thrive and prosper.

As the welfare state sprung up, we've also begun to see conflicts between the powerful pure socialism that exists within the family and the much weaker state version. For instance, many elderly people are outraged that they have to sell their houses to pay for their nursing care at the end of their lives. They demand that the state (i.e. other people's children) pay for the nursing care, so that they can provide substantial socialism in the form of inheritance to their own children.

And so we come to the issue of inheritance. Here several threads merge powerfully - the tradition of family socialism, the fact that parents worry about their offspring, and as mortality approaches, seek to protect them from beyond the grave. It's not accidental that the people who worry the most about inheritance taxes are the elderly, even though it arises after their deaths. And not many are as clear-headed and logical as Bill Gates on how inheritance could hurt their children.

Family socialism has the same strengths and weaknesses as the state version. As a support system, nothing beats the family, especially if you are ill or disabled. But families can also be indulgent, enabling and entrenching bad habits and laziness - giving is equated to loving, so you see poor mothers running up debts to buy their children the latest toys instead of simply saying, no, we can't afford it, we're on a budget. And you see adults "counting" on inheritance to bail them out of their problems instead of striving to solve them themselves. If critics of state socialism say that it demotivates and weakens the recipients of it, family socialism does this a hundred-fold.

The only way to resolve this would be to go back to the original purpose of family socialism - to protect the old and the sick. I would be in favour of inheritance going completely tax-free into a family fund if it could only be drawn on for the purposes of paying for nursing care, supporting an ill/disabled family member and to provide an income in old age, and that if the family fund was drawn on in this way, you got an offsetting reduction in benefits from the state. It would solve the problem of an aging population needing nursing care. It would solve the problem of people not thinking about their income needs in old age. It would solve the problem of parents desperately worried about offspring who are ill. It would remove some of the imbalance in society where some people get a capital leg up in enterprise. And if it turned out that you were one of those rare people who enjoyed perfect health in your lifetime and worked to the end, then you simply pass the family fund untouched to the next generation. Over the decades and centuries, someone among your descendents will get old or ill and draw on it.

Obviously people who are living high in the hopes of getting "free" and unearned money from their parents will hate this. For many people though, they just want to know that they are protecting their descendents from the ills life can throw at them, and they will be satisfied. The big question is which group is the biggest? The first group would prefer the current system where you get free money and simply spend it as you like, including blowing it all and having the state look after you at the end, and sadly this group is probably too big for my idea to ever get off the ground.

1 comment:

Alan Peakall said...

An interesting idea, snowflake. Had you considered the following alternative means of approaching this sort of regime by stealth from within the current system.

Recall that, back in 1985, Nigel Lawson proposed abolishing tax-free pension lump sums (since renamed PCLSs - Pension Commencement Lump Sums) on a non-retrospective basis before being forced to back down by the Life Companies' lobbying. If Brown/Darling were to return to the fray they might seek the same outcome but with the tax exemption preserved only for single premium long-term nursing cover. Since Brown has already established the concept of a lifetime allowance for capital taxation in the context of pensions, it would then be easier to extend it to the taxation of inherited capital.

The final objective might be a comprehensive capital tax (CCT), to replace CGT, Stamp Duty and IHT. When you consider that next April will see Brown/Darling delivering Lawson's income tax vision of a simple 40%/20% structure after all the baroque complexity of the intervening years, such a do-good-by-stealth plan does not appear so improbable.