The New Statesman Essay - A birthday gift for every teenager

Julian Le Grand and <strong>David Nissan</strong>on a modern way to redistribute wealth

There were snorts of derision when it recently became known that some ministers had been discussing giving every 18 year old a £10,000 birthday present from the state (though an New Statesmaneditorial endorsed the plan). Yet this apparently fanciful idea could become the cutting edge of a wider ambition to increase opportunity and reduce privilege. The key for Labour would be to link this potentially popular spending proposal with reforms to an unpopular and inefficient inheritance tax.

Earmarking the revenue from inheritance tax for such grants could help rehabilitate a much despised tax. However, it could only succeed if accompanied by measures to ensure that the sums given out did not go to waste. The price of giving 18 year olds an element of equal opportunity could be their accepting an ongoing paternalism, well into adult life.

Capital distribution matters more now than ever before. Changes in the economy are enabling more people to accumulate wealth. In the past few decades, owner-occupation and pension provision have massively expanded the numbers of wealth-holders. But the gains have not been spread evenly. The Inland Revenue estimates that the share of marketable wealth, including pension rights, of the top 10 per cent rose from 33 per cent to 36 per cent between 1980 and 1994, while the share of the top 50 per cent rose from 77 per cent to 83 per cent. An already grossly inequitable distribution has become even more unequal.

Moreover, the trend is set to continue. In the coming few years, equity-sharing schemes and share options will boost personal wealth further. But, inevitably, many will miss out on the bonanza: not just the low-paid and the unemployed, but also those in the public and voluntary sectors, where there are no profits to share or equity to hold. And an increasing proportion of already wealthy owner-occupiers are now inheriting the houses of their parents.

In a meritocracy, such divisions may have to be accepted. Certainly the government expresses no fears about the consequences of expanding the range of incentives available to private-sector employees. But entrenching wider wealth inequality has consequences for the agenda of social inclusion, as it expands the class of those who, by accident of birth alone, have greater opportunities than the rest. The children of the new wealthy can look forward to help throughout their adult lives; with university fees, housing deposits, start-up capital for business ventures. The aim of policy should not be to stop them, but to spread such opportunity more widely.

In America, the idea of capital redistribution is much higher up the political agenda than it is here. Academics and politicians there have proposed a range of schemes that would give capital to low-income families, through regular payments into savings accounts or large one-off transfers at the age of 21. As Robert Reich, a former US labour secretary, puts it: "Capital assets - rather than income - are now where the action is." American supporters of such ventures believe they should be paid for either from projected budget surpluses, or via supplementary taxes on the wealthiest.

Discussion of this kind of idea in the UK is far more muted. One of the authors here (Le Grand) proposed capital grants in a New Statesman essay some months ago. But the debate has yet to take off in any substantial form.

In one way this is surprising, since the arguments against redistribution through taxation, which gained such currency in the 1980s and 1990s, are harder to apply to capital than to income. How can one argue that people have as great a right to inherited wealth as to income or profits that result directly from their own efforts? Even incentive-based arguments are relatively weak; in order for effective inheritance taxes to weaken the economy, taking care of the next generation would have to be the main motive force for individual achievement. Yet this does not seem to be the driving force behind young ambitious men and women. Those who do not have children are not less concerned with their incomes and careers. In fact, the reverse could be argued. And the tendency of the ambitious to delay having children and forge their careers first would seem to suggest that other factors matter most.

Nevertheless, as with all new proposals involving increased public expenditure, public support would not be easy to ensure, though parents at least ought to feel the benefit via their children. None the less, persuasive arguments would be needed. Questions need to be answered at both the financing and spending ends.

Where would the money come from? Is it politically feasible to raise taxes to pay for such a scheme? Would politicians and the public support an unconditional grant to 18 year olds to spend as they like? How could we ensure that the money did not go to waste, but was actually used to accumulate wealth, as the scheme intends?

Certainly, one way of winning support would be to link the scheme with a currently unpopular and inefficient tax - inheritance tax. This link has an obvious internal logic, too, since the wealth of one generation would be seen to have been spread around to fertilise the growth of the next.

Inheritance tax is actually a misnomer in the UK. What we have is a tax on estates that bears little relation to the amount any individual inherits, either from the estate in question, or over a lifetime. And the tax is largely voluntary. The Inland Revenue estimates that in 1994, total personal wealth stood at £1,327 billion. In contrast, the yield from inheritance tax is pitiful, just £1.7 billion in 1997-98. Wealth passes almost untaxed between generations through lifetime gifts, through exempt items such as agricultural land and forestry, and through devices such as discretionary trusts which can defer tax liabilities for decades.

It is against this scale of wealth transfer that suggestions such as capital grants should be measured. There are approximately 650,000 18 year olds in Britain, so it would cost £6.5 billion to give them each £10,000. £10,000 is not that much money over a lifetime, yet it is inconceivable that the money could be found through general taxation.

The current yield of £1.7 billion from inheritance tax would only pay for about £2,500 per 18 year old, but that might be a sensible place to start (not least because it would reduce the sense of unfairness felt by those reaching 18 the year before). Yields, and hence the grant, could be increased in subsequent years by reforms that have long been on economists' agendas, but which have lacked popular support. These include shifting the basis for the tax from the donor to the recipient and to extend it to include lifetime inheritances and gifts. This would encourage the wealthy to pass on their wealth to those who have not already been substantial beneficiaries, as by so doing they could reduce the taxman's take. The system would require that everybody had a lifetime inheritance allowance, say of £50,000-£100,000, which could be received free of tax. Thereafter tax could be levied at progressive rates to maintain incentives for wealth to be spread around. A review of exempt items and trust law might broaden the base of the tax.

In theory, receipts could collapse with such a tax if bequests were directed only to those who had not used up their inheritance tax allowance. However, if that occurred, a fairer distribution of inherited wealth would have been achieved, and there would be little need of an additional system of grants. More likely, however, is that wider bequests would happen mainly at the margins, as people would continue to want to help their own children first. The price of this would be taxes to pay for grants for those less lucky.

Two obstacles have stood in the way of such proposals in the past. The insignificant contribution of inheritance tax to financing public spending, and the sense of the state as inherently wasteful, have meant that avoiding such tax has never attracted much moral opprobrium. The ease of avoidance of inheritance tax reflects the lack of public support for it. But if the proceeds of the tax were distributed through capital grants, perhaps that perception could change.

Political support, though, would also depend on what happens at the other end of the scheme: what the recipients of the grant did with the money. The intention of the scheme is to encourage investment and hence the accumulation of capital (financial, physical or human). Hence grants must be spent on investment opportunities. There would be no surer way to lose popular and political support for a system of capital grants than a few well-publicised cases of young men blowing their grants on cocaine.

But what is needed is little more than is commonplace nowadays when money is passed on. Few parents would entrust tens of thousands of pounds to the very recently adult. They might put money aside, but they would pass it on only when convinced it could be well spent. Public money needs handling in similar ways.

Administratively, capital grants could be paid into a special account held in the recipient's name either in a local commercial bank or in a local branch of a network of publicly owned savings institutions set up by the government specifically for this purpose. The account would have a special name: since its purpose is for the accumulation of capital and education, one possibility is the simple acronym ACE. Each ACE account would have a set of trustees, whose purpose would be to approve the spending plans of the individual concerned before releasing any capital; hence individuals would be able to draw money from the account only to spend on approved purposes, as defined by the trustees.

Having quality ACE trustees would clearly be crucial to the scheme. For they would not only have to vet the spending plans, but also ensure that the money was spent in the way proposed. They could be specially employed by the local institution to vet the spending plans of all the grants being given out by that branch; alternatively they could be drawn from panels of local business people and other community leaders.

What sort of investment purposes might they approve? One obvious possibility is higher and further education: a way of accumulating human capital and hence increasing an individual's value to the labour market. The grant could be used to contribute to the fees and maintenance costs of a university education, or the costs of more vocational forms of training. To ensure compliance, it could be paid through the educational institution concerned, in much the same way as the present student grant and loan scheme.

Another use for the grant would be to form the down payment on a house or flat purchase. For many people the down payment is the biggest obstacle to home-ownership; once it is made, people have a commitment to their homes and usually manage to keep up the mortgage payments regardless of any income or employment problems they encounter. The payment could be made directly to the vendor to ensure that the money was not unwisely spent.

The grant could also contribute to the start-up costs of a small business. The development of a business plan and its approval by the trustees would be essential - which makes it the more desirable to include local business people among the trustees.

Finally, the grant could be used to start a personal pension. The pension schemes could be drawn from an approved list, and payment made directly from the ACE account to the scheme.

One possible objection to the scheme concerns its unconditional character. It might be thought better to have a scheme that requires some form of matching contribution to the ACE account from the individuals themselves or from their families. So, for instance, the government could offer to match personal or family contributions at a rate of, say, £1 grant for £1 contribution, or at a higher (or lower) rate. The matching rate could vary with the income of the family, higher for poor and lower for better-off families - perhaps even dropping to zero for the very well-off.

Varying the matching rate in this way might make the scheme more politically acceptable, but would have the disadvantage of requiring a means test. It might be better to pay the grant to all, but count it for lifetime inheritance and gift purposes. The well-off would repay their grants as further bequests came their way.

The present government is implementing impressive measures for alleviating poverty. But it also needs to devise a longer-term strategy for spreading opportunities more widely and preventing poverty arising in the first place. A scheme such as the one we propose here could form a crucial part of such a plan.

Julian Le Grand is the Richard Titmuss professor of social policy at the LSE. David Nissan is research fellow with the Fabian Society's Commission on Taxation and Citizenship

This article first appeared in the 04 October 1999 issue of the New Statesman, The eminence rouge