Best selling author of ‘Capital in the 21st Century’, Thomas Picketty, appeared on ABC’s Lateline last night where he urged Australia to implement an inheritance tax to help tackle income and wealth inequality:
EMMA ALBERICI: We are, in fact, if I am correct we are one of the only countries in the Western world that doesn’t have a death tax.
THOMAS PIKETTY: Right. So if you take countries like Britain or Germany or the US or France or Japan, you have inheritance tax on the very high property, very high wealth transmission around 40 – 45 per cent.
Japan just raised its top inheritance tax rate from 45 to 55 per cent last year. This was under a right wing government.
In Germany, I don’t hear Angela Merkel or I didn’t hear Cameron in Britain say that he wanted to reduce the inheritance tax of 40 per cent to the Australian level of zero per cent.
So this is very unusual, specially, I am not talking of small transmission of $100,000, but if you receive millions and millions and if people who start from zero have difficulty accessing property, what is the priority?
The priority is not to raise tax for the pleasure of raising tax. The object is to reduce the tax for others, in particular for middle wages and lower wages.
The property tax system in Australia, like in many countries, it is not I think equitable in the sense if you have a lot of debt, you try to access a property of $500,000 or $800,000 and you sometimes start with a debt which is just as big and it takes you 20, 30, 40 years to repay this debt, you are going to pay the same property tax as someone who has inherited from the property with no debt.
So this needs to be reformed so that people who are trying to access property and the bottom 50 per cent or even the bottom 90 per cent in this country has limited wealth and you want to increase wealth mobility, their ability to access wealth which means that people who are more accommodated will have to pay a bit more.
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.