The Trouble With Billionaires
The notion that it should be possible to become a billionaire is rooted in the idea that there are some uniquely talented individuals whose contribution is so great that they deserve to be hugely, fabulously rewarded.
Some billionaires, such as Leo J. Hindery Jr., have made this point themselves. Hindery, whose contribution was to found a cable television sports network, put it this way: "I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear." Similarly, Sanford Weill, long a towering figure on Wall Street, is impressed with the contributions of billionaires like himself: "People can look at the last 25 years and say that this is an incredibly unique period of time. We didn't rely on somebody else to build what we built..."
What is striking in such statements, in addition to the absence of modesty, is the lack of any acknowledgement of the role of society in their good fortune. These men seem unaware of the pervasive role played by society in general (as well as by specific other people) in every aspect of their lives -- in nurturing them, shaping them, teaching them what they know, performing innumerable functions that contribute to the running of their businesses and indeed every aspect of constructing and operating the market that has enabled them to get rich. Weill's statement that "We didn't rely on somebody else to build what we built" can be quickly tested. Would Weill, having built everything from scratch, be able to reproduce his fortune if stranded on a desert island?
If so, then he should be able to keep every bit of it for himself, having been solely responsible for its creation. If not, then it is reasonable to ask what portion of it was created by him, and what by others?
The Desert Island Test is a useful one to keep in mind. The primacy and ubiquity of society -- so casually erased by billionaires and others justifying their fortunes -- must be restored if we are to have any meaningful discussion of income and wealth, and where an individual's claim ends and society's begins.
One of the crucial ways that society assists individuals in generating wealth lies in the inheritance from previous generations.
This inheritance from the past is so vast it is almost beyond calculation. It encompasses every aspect of what we know as a civilization and every bit of scientific and technological advance we make use of today, going all the way back to the beginning of human language and the invention of the wheel. Measured against this vast human cultural and technological inheritance, any additional marginal advance in today's world -- even the creation of a cable television sports network -- pales in significance.
The question then becomes: who is the proper beneficiary of the wealth generated by innovations based on the massive inheritance from the past -- the individual innovator who adapts some tiny aspect of this past inheritance to create a slightly new product, or society as a whole (that is, all of us)?
Under our current system, the innovator captures an enormously large share of the benefits. Clearly, the innovator should be compensated for his contribution. But should he or she also be compensated for the contributions made by all the other innovators who, over the centuries, have built up a body of knowledge that made his marginal advance possible today? What share of the newly-generated wealth correctly belongs to the society that has not only nurtured him but also provided him with this rich past inheritance -- without which, stranded on a desert island, he wouldn't have the means to even keep himself warm.
It is our position that society -- and by extension, all of us -- should be entitled to a much larger share of the benefits.
Hence our key proposal: that Canada introduce an inheritance tax, and use the proceeds to establish a new system of lifetime education trusts for every Canadian child.
This is a highly ambitious proposal, but that is part of its appeal. It offers the chance to make a change that would have an immediate and profound impact towards reducing inequality in this country.
The first part of the plan involves enacting an inheritance tax -- which is the most progressive kind of tax, since it typically affects only the wealthiest one or two per cent of families. Canada has had no tax on inheritances for almost four decades, when the federal estate tax was quietly abandoned, creating a windfall for Canada's richest families worth about $62 billion (in today's dollars).
We propose a variation of the old estate tax -- one that would impose the tax on those receiving the inheritance, rather than those leaving it. This would ensure that the tax achieves one of its purposes: to tax unearned wealth. We propose an individual be able to receive a lifetime total of, say, $1.5 million of inheritances (and gifts) without having to pay any tax on them.
For amounts above $1.5 million, a low rate of tax would apply. The rate would rise gradually on larger inheritances. Individuals receiving truly massive inherited fortunes would face a top tax rate of 70 per cent on amounts above $50 million. (Among other things, a tax structured this way would encourage donors to leave their wealth to a larger number of individuals, as a way to minimize the overall tax.)
We suspect that most Canadians would appreciate the fairness of taxing extremely large inheritances, which are, after all, the product of no effort, labour or skill, other than being born into the right family.
The circumstances of birth are always a key determinant of financial wellbeing. Multi-billionaire Warren Buffet has dubbed this the "Ovarian Lottery." Buffet points out that if he had been born in an earlier epoch of human history, he (and for that matter Bill Gates) might well have ended up as some other animal's lunch because both he and Gates have poor vision and can't climb trees well. His point is that those lucky enough to be born with appropriate talents for their time and place are winners in the Ovarian Lottery.
But those who inherit wealth are particularly extreme winners in the Ovarian Lottery. They don't have to work at all. The money just falls into their hands. And then, in case this enormous amount of luck isn't enough, the government of Canada tops it up by exempting inheritances from taxation, thereby allowing this supremely favoured group to be spared paying the taxes that apply to other forms of income received by Canadians who must work for a living. As one of the few nations in the world without an estate or inheritance tax, Canada has created what could be considered an Ovarian Lottery on Steroids.
Our proposed inheritance tax would only affect the truly rich, and the level of taxation would only be high on the exceptionally rich. But there are a number of exceptionally rich Canadians. There are, for instance, 97 Canadian families with fortunes worth more than $500 million, including 55 families with fortunes worth more than $1 billion. Canada has long had a number of fabulously wealthy families dominating the economic landscape, and our failure to tax their intergenerational transfers in recent years has only fueled the growth of old and new dynasties. An inheritance tax is essential if we want to prevent them from turning into a kind of permanent aristocracy.
But now we come to the really exciting second part of our plan: an education trust fund for every Canadian child. The revenue collected from the inheritance tax would be used exclusively to create individual trust funds for the next generation of Canadians. Each child, upon turning 16, would receive $16,000, deposited into an individual trust, which could be used exclusively for education or training.
This would mean that very large fortunes accumulated in this and previous generations would be taxed so that children in the next generation would have a greater chance to develop their talents and skills. It would amount to a direct transfer of wealth, taking from the very richest families and giving improved education possibilities to all Canadian children as they enter adulthood.
Inheritances are clearly unearned income -- a gift that only a very few individuals, as a result of their lucky draw in the Ovarian Lottery, will ever receive. So imposing a limit on how much of this unearned income is received tax-free seems perfectly in keeping with the moral principles and sense of fairness held by most Canadians.
The American Dream, despite its iconic stature on both sides of the border, has always been more myth than reality. As it sadly fades further into mythology in this new age of extreme inequality, Canada could boldly emerge with an exciting new version -- one that puts real heft behind the notion that society is a community and that everyone in the community should have a chance to live their dreams.
This excerpt is from The Trouble With Billionaires by Linda McQuaig and Neil Brooks. Copyright © Linda McQuaig and Neil Brooks, 2010. Reprinted with permission of Penguin Group (Canada).