Former RBA Governor, Ian MacFarlane, has given an interview in The Australian, whereby he has called for a broad program of tax reform that includes an inheritance “wealth” tax:
“The whole tax system needs to be restructured”…
“The political right says we need to tax consumption to broaden the tax base”…
“That’s correct, but if you are going to do that, you should also tax wealth. A tax on inheritance is probably the least-painful tax you can levy”…
“Everyone knows it’s better to have a broad (tax) base and low rates, whereas we have got a narrow base and high rates”…
“Somehow or other, in order for the long-run sustainability of the country, we have to get a more efficient tax system and a much broader base”…
MacFarlane’s proposal for an inheritance tax is certainly interesting.
The Henry Tax Review gave in principle support for an inheritance tax, although it was buried in just a small section of the huge report.
The Henry Review called it a “bequest tax” – a tax that would be levied on the accumulated wealth of people at the time of their death.
However, while the Review argued that it would be economically efficient and equitable, it shied away from recommending the idea because of its controversial history:
A bequest tax would be a relatively efficient means of taxing savings. Decisions to save taken solely to fund consumption later in life would be unaffected. But decisions to save motivated by the desire to leave a bequest would be affected and this would impose some efficiency costs. In aggregate, though, bequest taxes are not likely to introduce large biases into donor behaviour. A bequest tax could increase labour supply and savings by recipients and prospective recipients, though the effects would be limited.
Such a tax could also be a progressive element of the tax and transfer system. Because the distribution of wealth in Australia is so uneven, most of the revenue available from a bequest tax could be raised from the top 10 per cent of households by wealth.
A tax on bequests would fit well with Australia’s demographic circumstances over the coming decades. Over the next 20 years, the proportion of all household wealth held by older Australians is projected to increase substantially. Large asset accumulations will be passed on to a relatively small number of recipients. On the other hand, a bequest tax would be complex. There would be a need for anti-avoidance provisions, including a tax on gifts. There would, inevitably, be significant administration and compliance costs.
A tax on bequests should not be levied at very high rates. People should not be unduly deterred from saving to leave bequests. A substantial tax-free threshold combined with a low flat rate beyond that point would be an appropriate structure for a bequest tax. Bequests to spouses should be concessionally treated.
Another design issue is whether to tax the whole of the donor’s estate or the inheritances received by individual recipients. There are arguments on either side, but on balance, they probably favour taxing each estate as a whole. A large number of other design issues would need to be considered. The more concessions and exemptions in the bequest tax, the greater its complexity and the greater the risk to efficiency and equity goals.
The Review has not sought to recommend the introduction of a bequest tax at this time, but believes that there should be full community discussion and consultation on the options.
According to Professor Frank Stilwell, inheritance taxes existed in Australia until the late-1970s, whereby they were levied by both state and Commonwealth governments.
In 1978, Queensland Premier Joh Bjelke-Petersen abolished the state’s inheritance tax, which was followed by the governments of other states. Prime Minister Malcolm Fraser then followed suit and eliminated the federal inheritance tax.
National inheritance taxes also exist in many other developed countries, such as the UK, Germany, Italy, Belgium, the Republic of Ireland, France, the Czech Republic, Canada and some states in the USA.
Given the extreme pressures on the Budget as the population ages, along with the growing tax burden being placed on the diminishing pool of workers, perhaps it is time that an inheritance tax is placed back on the Budget reform agenda, alongside the closure of Australia’s world-beating, inequitable and fast growing tax expenditures (concessions)?
