children a value double or treble that of each hundred francs of his own inherited property.""

This line of argument is very plausible. It resembles Professor Gonner's argument that a fall in the rate of interest tends to increase saving, since more saving than before is now necessary in order to secure an amount of property yielding a given income. The latter argument indeed tails, partly because, owing to the very unequal distribution of property in modern communities, a comparatively small number of rich people do the bulk of the saving and invest, for the most part, merely income surplus to habitual expenditure. These are tempted to save more by a higher, and less by a lower, rate of interest. Those who invest in order to secure from their investments a certain minimum income and tend, therefore, to save more when the rate of interest falls, though perhaps more numerous, are less rich than the former class, and their savings much less important in the aggregate. If the latter class predominate in the will to save, the former predominate in the power to

save.

But Professor Rignano's argument is stronger than Professor Gonner's. For he suggests, in effect, that the adoption of his plan would place many members of the former class in the position of the latter class, and would reinforce their power to save with a strengthened will to sa.ve. Looked at from another angle, the effect of the adoption of his plan would be to raise the marginal utility of savings made by themselves, while reducing

1 Ibid, pp. 67-68.

• Compare Gonner, Interest and Saving, p. 67, and Marshall, Principles, pp. 234-5.

Some light might be thrown on the matter by a study, if the facts were available, of the conduct of life tenants of property, which at their death is to pass away from their family, as compared with tenants in fee simple. Probably such life tenants work harder and save more, as a general rule, than similar tenants in fee simple.

**

the marginal utility to them of the savings inherited from previous generations. For the marginal utility of either sort of savings depends largely upon the power of leaving them to their children. Moreover, Professor Rignano relies upon an increased stimulus to work among those desirous of leaving property to their children.

It is not easy to be sure whether Professor Pigou is right in thinking that an inheritance tax on Professor Rignano's plan would discourage saving, but discourage it less than other sorts of inheritance tax, or whether Professor Rignano is right in thinking that such a tax would actually stimulate work and saving. But it is clear that, from the point of view of its effects upon production, a tax based upon the Rignano principle is superior to a tax based upon any of the other three principles considered at the beginning of this chapter, and it is also clear that, if administratively feasible, a tax based upon the full Rignano principle is better than one based upon the simplified Rignano principle.

§9. We may now turn to a difficulty which presents itself in connection with all inheritance taxes, namely, the possibility of evasion of the tax by the transfer of property by gifts inter vivos, that is to say, by gifts from one living person to another. In principle, such gifts should be treated, for purposes of taxation, on the same footing as inheritances, for to acquire property by gift is substantially the same thing as to acquire it by inheritance. In practice, it seems hardly possible either to tax all such gifts as inheritances, or effectually to prohibit them altogether, as has sometimes been suggested.1 But various considerations suggest that the seriousness of the problem is less than might be imagined. Small gifts inter vivos need not trouble us. They are only glorified tips and of no concern to either tax-gatherer

1 Compare Rignano op. cit., p. 27.

W

or statesman. Substantial gifts, on the other hand, will generally be traceable, and consequently taxable. In countries where the law of legitim prevails, gifts inter vivos are not allowed to defeat the law, nor are fictitious sales for a nominal purchase price, by means of which gifts are often sought to be concealed.1 Somewhat similar problems of " disappearing assets" have been successfully dealt with by British lawyers in connection with the law of bankruptcy and the law of trusts. And already under the British law, gifts made within three years of death' are subject to death duties.

Moreover, if we adopt a tax on the Rignano principle, the inducement t› evade the tax by gifts inter vivos will be to some extent diminished, since such gifts will tend to diminish that part of a person's property, which at death will pay the lowest rate of tax, while, if in addition we adopt the plan that all inherited property must be settled on trustees, we reduce the possibility of gifts still further.

In any event, the desire of rich men to die visibly rich, and their disinclination to part with control over their property, the human weaknesses of vanity and love of power, will always strongly check the tendency to make gifts inter vivos. And such gifts as do take place, as has already been noted, are likely somewhat to diminish both production and inequality and to increase the welfare derivable from a given expenditure. Harcourt in 1894, when it was foretold that one of the effects of his increased death duties would be to cause fathers to give their property away to their sons during their lifetime, replied, "I am on the side of the sons."'

1 Compare the American case In re Gould, where a father assessed the value of his son's services in his business at five million dollars, but the Court held that the alleged contract was illusory, and that the five million dollars were a gift, and liable to inheritance tax. See Read, Abolition of Inheritance, p. 298.

And charitable gifts within one year of death.

• A student in one of my W.E.A. tutorial classes, who is also on

§10. So far we have been considering inheritance taxes in the ordinary sense, that is to say taxes imposed on inherited property at the moment of its inheritance through the death of its previous owner. It remains to notice that it is possible to impose a special tax upon inherited property, or the income therefrom, at other times than when property changes hands by reason of death. Given an administrative system, under which every individual's holding of inherited property was known, there would be no difficulty in imposing such a tax, and its general effect would be similar to that of a tax on the Rignano principle upon property passing at death. One of the simplest methods of imposing such a tax would be by an amendment of the income tax, distinguishing three categories of income, instead of two, as at present, namely, income from work, income from earned property, and income from unearned or inherited property, and taxing the second category at a rate intermediate between the first and third. This would go some way to meet the objection to the present income tax, which has been dwelt upon by Professor Pigou1 and others, that it differentiates against saving. It may be objected that this distinction between earned and unearned property is not strictly equitable, since the possession of a large amount of unearned property facilitates the accumulation of earned property. But it is equally true that the possession of a large amount of property facilitates the acquisition, through expensive training, and otherwise, of a large income from work, and this fact does not invalidate the broad distinction between earned and unearned income.

the side of the sons, has suggested to me that a tax on individual inheritances might be graduated, not only according to the amount inherited, but also according to the age of the inheritor, an addition of, say, 1% being made to the duty for each year by which the inheritor's age exceeds 45.

1 Wealth and Welfare, p. 370.

CHAPTER X

SOME SUGGESTIONS FOR THE REFORM OF THE LAW OF INHERITANCE.

§1. The ideal law of inheritance, whether from the economic, or from a wider, point of view, will vary with the special conditions of different communities and different ages. It will vary with different forms of social organisation and of the general law of property. It will depend also upon current opinion, both as to what is economic and as to what is just.

Independently of larger changes of a socialistic character, though perhaps concurrently with them, it seems likely that modern communities will move towards the extinction of inherited individual wealth, at any rate above certain comparatively small amounts, and that in this movement taxation will be the chief implement of progress. Since, as we have seen, the institution of inheritance is one of the most important causes of the inequality of incomes, this movement is likely to be beneficial, in so far as it will tend to reduce inequality. On the other hand, it may be harmful, if it tends to check the growth of productive power. For, as we have also seen, the only solid economic justification of the institution of inheritance in its present form is that it is one of the most powerful engines yet discovered for the accumulation of capital. The object of the present chapter, therefore, is to explore some possible modifications of this institution and to consider how best to secure that gain from diminished inequality shall not be offset by loss from diminished productive power. The proposals which will be made have special application to the United Kingdom and are put forward tentatively.