Fairfax’s Money Section this week asks whether the new Abbott Government tax review will see the re-introduction of so-called “death duties”, also commonly known as “inheritance taxes”.
The column follows an interview in December by former RBA Governor, Ian MacFarlane, in which he 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”…
It is worth noting that inheritance (death) 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.
In his Money column, linked above, Fairfax financial guru, Noel Whitaker, gave an inheritance tax short thrift, arguing that “they are easily evaded by the rich and are now unnecessary in view of the other taxes mentioned before”, namely “the 15 per cent plus Medicare Levy on the taxable component of a super fund that is left to a non-dependant, and capital gains tax on assets left to beneficiaries when an investor dies and the beneficiary cashes them in”.
The Henry Tax Review, however, was less dismissive. It 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, rather than dismissing it outright.
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 – namely labour income and company profits – raising Australia’s growth potential.
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