Tim Costello, chairman for the Community Council for Australia and World Vision CEO, has called for the implementation of a “death tax” for Australia’s super-rich families, which he claims could raise some $5 billion of additional revenue for the Budget, while improving equity. From The Canberra Times:
“This should simply be on the table,” [Costello] told Fairfax Media.
Australia was facing growing income inequality. Baby boomers who had benefited from free tertiary education, the housing boom and superannuation tax breaks, now held about 40 per cent of the nation’s wealth…
Mr Costello said ABS and ATO data shows that about 100,000 Australians have net wealth in excess of $5 million. A quarter of those (about 25,000) have net wealth above $10 million. If just 4 per cent of those households paid 35 per cent in estate duties, it would equate to about $5 billion a year in annual revenue, Mr Costello said.
And at a $5 million threshold, the tax would apply to less than 1 per cent of the Australian population, he said. “So people generally hate death duties, but 99 per cent of Aussies will not be affected,” he said.
“Two things are certain in life, death and taxes; if you have to pay taxes the best time is when you die; you are liquidating assets and you can still leave the bulk to your kids,” he said.
Tim Costello makes some very good points.
National inheritance taxes exist in many other developed countries, such as the UK, USA, Germany, Belgium, the Republic of Ireland, France, and Japan (see next chart via Fairfax).
Australia also used to have inheritance taxes. But 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
The Henry Tax Review also gave in-principle support for an inheritance tax (called a “bequest tax” in the report), noting that it would be economically efficient and equitable. Still, it shied away from outright recommending re-introducing a bequest tax 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.
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, it would seem appropriate to at least place an inheritance tax on the Budget reform agenda.
OECD countries raise on average 0.41% of total taxation revenue from inheritance taxes. Even if this low rate was replicated in Australia, it could raise around $1.6 billion of additional Budget revenue each year.
Alongside closing Australia’s inequitable and fast growing tax expenditures (concessions), and adequate taxation of land and resources, an inheritance tax would help to broaden the tax base, and remove the burden from productive effort – especially labour income – raising Australia’s growth potential.
