Plastic people and a solution to the Piketty problem

On Monday June 14 Swiss citizens will vote on whether to change the inheritance tax laws in the country. At the moment estate taxes vary from 50% in one canton to zero in another, so the law does need to be simplified. But many worry that the proposed 20% rate could damage family businesses, which account for 80% of employment in the country.

Tobias Trütsch, an economist from the University of St. Gallen, estimates that 12,000 jobs a year could be lost for the next five years. Switzerland is not alone. Germany, whose Mittelstand of mainly family-owned manufacturing businesses are the bedrock of its economy, is currently debating similar legislation.

This is just part of a larger story: the debate about inequality. This was brought into the foreground with the publication of Capital in the 21st Century, a book by French economist Thomas Piketty, which worried that countries are becoming more unequal and that this has deleterious effects. Piketty thinks that wealth, and not just income, ought to be taxed.

At Family Capital we have argued before that there is a need to balance the benefits of family businesses – their long-termism, stability and loyalty to staff, for example – with their tendency to embed inequality over generations. In short, we need to ask the question is: “How much inequality can be tolerated?”

But is an answer to this conundrum staring us in the face? Last week Horst Brandstätter, the patriarch of the Playmobil empire, died aged 81. He entered the family toy-making business, which was run by his two uncles, at the age of 19 in 1952. Six years later he invented the hula-hoop and in the 1970s oversaw the creation of the Playmobil figures. There are now 2.8 billion in the world.

The sole owner, he left the group in great shape: revenues were €595 million in 2014. The business is also immune to family squabbles, because since the mid-1990s all profits have been funnelled into a foundation to support children. The foundation will now own and manage the Playmobil empire.

This is a relatively common structure in northern European family companies. Bosch, the giant German electronics firm, is 7% owned by the founding family, and 93% owned by the Robert Bosch Stiftung, a foundation, which over 50 years has granted more than €1 billion to medical, educational and other projects.

Danish brewer Carlsberg has been 51% owned by a foundation since 1887 and among hundreds of projects has funded the rebuilding of a castle, research into brewing, and expeditions to study ice in Greenland to increase knowledge about climate change. 

Perhaps the best example, though, is the Swedish Wallenberg empire. The Wallenbergs’ holdings are worth €250 billion, and include big chunks of businesses including mining firm Atlas Cosco, white goods-maker Electrolux and engineering firm Saab. Everything is owned by foundations.

The largest, the Knut and Alice Wallenberg foundation, was set up in 1917 and since then about 20 more have been added. All profits from the Wallenbergs’ holdings go into the foundations and are then used for good works, invested in their companies or used to make more acquisitions, a system the family call a “closed circuit”. Together the foundations give about €300 million a year to fund research and education. 

Three fifth-generation Wallenberg family members sit on the boards of the foundations and companies, and their only income is from these positions. “I feel blessed that I have the opportunity to participate in [world-leading companies] and not to have to get into the personal squabbles about personal wealth,” Jacob Wallenberg said in a recent Financial Times interview.

Although their holdings are worth €250 billion, the family don’t even feature on the list of Sweden’s richest people. Foundations have many benefits: they put wealth to good use, they eliminate fights over money and they stop children becoming corrupted by money. 

Could families be persuaded to give up some of the trappings of wealth and focus instead on social impact, and a less public type of power? If so, more foundations could be a neat solution to the Piketty problem. Promoting them would be a good use of government time and energy.