The role of inheritance in Sweden, 1810-2010

1. The role of inheritance in Sweden, 1810-2010 Presentation at the workshop “Inequality, Crisis and Taxation”, March 7, 2012, Paris Jesper Roine, SITE, Stockholm School of Economics (joint work with Henry Ohlsson and Daniel Waldenström, Uppsala University)

2. Estimate the annual inheritance flow in relation to national income in Sweden for the period 1810-2010. • Role of inheritance, of course, interesting in general for a number of reasons (Piketty, 2011)… • …but, in particular in this context, interesting to compare Sweden to France and UK. Somewhat different history in terms of household wealth, timing of industrialization and, in particular, the role of the welfare state. What we try to do and why?

3. Sweden a late industrialiser that rapidly grows from poor to rich in the period 1870-1970 • Long tradition of “self-ownership” among small farmers, but also nobility with hereditary privileges (some which remain today). • Growth and development of the welfare state over the 20th Century. Incentives not to accumulate household wealth (but potentially also to hide wealth or avoid owning wealth “personally”). Why might Sweden be different?

4. Following Piketty (2011), we can estimate the inheritance flow in two ways: • National income and wealth accounts and the basic accounting equation: • B/Y = μ ∙ m ∙ W/Y • B = annual inheritance flow • Y = national income • W = aggregate private wealth • m = annual mortality rate = (tot number of decendents/tot living population) • μ = ratio between average wealth of the deceased and average wealth of the living • b = W/Y= aggregate wealth income ratio • Directly by observing inheritance flows in estate data • In the Swedish case a third related method is available based on wealth tax data (“second best” consistency check due to lack of data for 2) Ways of estimating the inheritance flow

5. National income and wealth accounts: B/Y = μ ∙ m ∙ W/Y • Y: National Income? • Good data on GDP and capital depreciation but not on net foreign flows • Current series: Estimating NI based on available data • W: Aggregate private wealth? • Prior to this project, wealth totals from various sources • Current series: New data from Waldenström (2012) • m: Annual mortality rate, i.e. tot number of decendents/tot living population? • Current series: Readily available data since 1700s (Statistics Sweden) • μ: ratio between average wealth of the deceased and average wealth of the living? • Current series: Obvious for the living (adult pop), average wealth of deceased most problematic: Available for a few years based nation wide observations of estates (“full sample”) in various public investigations and for various regions in the 1800s • βt = Wt/Yt aggregate wealth income ratio from the above Available data for Sweden 1810-2010

6. Directly by observing inheritance flows in estate data • Annual, aggregate data only available for tax revenue. No use due to progressive taxes • “Total coverage” of estates available in • 1873-1877, public investigation, market values, about 50 % of deaths • 1906-1908, public investigation, market values, about 50 % of deaths • 1943-44, public investigation, tax values, about 20 % of deaths • 1954/55, public investigation, tax values, about 30 % of deaths • 1967, public investigation, tax values, 100 % of deaths • 2002-2003, public investigation, tax values, 100% of deaths • All claim to be capturing “all relevant estates”; tax values most likely large source of underestimation. Available data for Sweden 1810-2010 (cont.)

7. Comparatively rich data on wealth due to wealth tax (since 1912) • Using wealth-age distribution of household wealth (of the living) and multiplying each age group with appropriate mortality rate we get a proxy for “predicted inheritance” • Wealth distribution based on tax values means underestimating total wealth. • Current solution: Use new series on aggregate household wealth (Waldenström, 2012) and assume this is distributed over age like the tax valued wealth gives predicted inheritance Available data for Sweden 1810-2010 (cont.)

8. Example of “inverse mortality multiplier” Available data for Sweden 1810-2010 (cont.)

9. Using national income and wealth accounts (1810-2010) • μ is most problematic as we must use estate data to get average wealth of the deceased (and hence only available for a few years). • 2) Direct observation of estate data (a few scattered years 1873-2003) • 3) Inverse mortality multiplier method to get predicted inheritance (1920-2007) • also relies on wealth totals as wealth tax data does not cover “all wealth”. Also on distributional assumptions. • Corrections: • Approx. correction for non-filers and tax exempt assets (applicable only for observed inheritance): Relatively ad-hoc, based on ratio observed estates and actual deaths and info on wealth distribution (+15-25%) • Gift corrections: Raw gift correction based on ratio of gift tax receipts and estate tax receipts (+4-31%) Three (interrelated) ways of estimating Swedish inheritance flows

10. With the new wealth series we can calculate the wealth income ratio βt = Wt/Yt for the whole period 1810-2010 Results: Ratio wealth to income

11. What is the predicted steady state flow b= βt/H for the period? Assuming generation length H=28 years Results: Predicted steady state inheritance flow

12. Results: What do we observe in our data? Period 1870-2010 Estate observations probably have good coverage but are based on tax values in all surveys after 1908

13. High values in the early 1800s entirely driven by high μ values (300-350%). This is guess work based on averages of average estate values in individual cities and villages at different points in time during 1800-1900. These fluctuate a lot! Results: What do we observe in our data and if we guess? Period 1810-2010

14. Our data on the relationship between average wealth of deceased and living is very preliminary. Could change the picture (but unlikely that flows will be as high as in France in the 19th C) Inheritance flows in Sweden compared to France

15. Estates for the years when we have them have good coverage and should in principle cover the total inheritance flow. Corrections for tax exempt assets and small estates and for gift corrections have been made. These can be discussed but the main thing is the tax based valuation of assets. • Better (micro) data on wealth-age distribution exists 1968- (though still based on tax values. Still possible to get better “inverse mortality multiplier” estimates. • Much more needs to be done on estimatingμ, especially for the 19th C. Main challenges with current data

16. In principle estate data exists in archives (legally required for all since 1736) but they are spread out and would require major effort to get enough observations For more recent years an ongoing project is collecting estates for “the LINDA sample individuals” that die. (LINDA is representative panel of about 3 percent of population). Numerical simulations also to be done. Main options to get better data

17. How to think about negative wealth and public pension claims etc. Potentially underestimated “foreign assets” and closely held companies (especially forest land). Ownership through tax exempt institutions etc. Also “fideikommiss” still relatively large in Sweden (but again with clear restrictions on how to use assets). …and probably many other things Remaining issues that need to be dealt with

18. The inheritance share of national income was around 10 % in the early years of industrialization in Sweden (1870s) It then increased to about 15 % around 1910 and then began to decline to about 5 % in the early 1980s and has since probably increased again to levels around 10%. The recent increase is consistent with private wealth increasing sharply since 1980 in relation to income Even though a large part of the population accumulates very little wealth (about 25% have negative wealth) the aggregate role of inheritance is about the same as in France and increasing. Summary of the preliminary results