Death to the Death Tax!

The front page of the Australian is highlighting that the Labor party is starting to make inequality an issue for the next election, and Leith ran a post yesterday about the Labor party and a possible inheritance tax for next year.

I find the whole inheritance tax debate fascinating. In my experience Australian’s have 3 main irrational beliefs:

  1. The price of residential property shall increase every year and never fall
  2. Franking credits are more valuable than cash dividends
  3. “Death taxes” are a terrible form of taxation

I won’t bother discussing residential property as it has been done exhaustively on the MB site.

On franking credits, as a young analyst in the 1990s I remember trying to convince a retail stockbroker to buy a security for his clients that had an unfranked yield of 9% vs another security (from the same company) with a 5% yield. I think the conversation went:

Me: Security B is the same security as Security A over the same company but you get almost twice the yield

Retail broker: But Security A is franked

Me: It doesn’t matter – regardless of your tax rate you will get more from Security B

Retail broker: You don’t understand. If I buy Security A my clients will get money back at tax time. Security A is franked.

Me: But you will get 9% immediately from Security B now, vs 5% now and 2% back in a year or so when they do their taxes

Retail broker: But my clients like getting franked dividends. Security A is franked.

Me: Don’t they prefer more money over over less?

Retail broker: But Security A is franked

I obviously lost that debate in the face of the ironclad nature of his logic.

Which leads to inheritance taxes (or death taxes if you are against them). I’m interested in the MB communities view on how acceptable or not they are to the general public.

To me, a very easy first step would be to make money from superannuation that is inherited taxable. I know, I know. Why would I (as someone who benefits from more money in superannuation) suggest that taxing inherited super might be a good thing. Let’s call it a moment of weakness.  The (now deceased) recipient was given generous tax breaks so that his/her retirement could be funded – why should those tax breaks be passed on to his/her heirs who are already getting their own tax breaks on superannuation?

But logic doesn’t play a big part in this debate.

Which is why I’m interested in the general view about how politically dangerous inheritance taxes are. Are Australians irrational about inheritance taxes?

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  1. Has Nathan Tinkler moved to Singapore? If so, I am not sure how an inheritance tax would work in that instance.

    I would sooner have other taxes:

    * $100k upfront for each 2-year 457 visa and another $100k for a 2-year extension
    * Link Medicare cards to train tickets and charge unlinked tickets $40/day for train travel
    * Sugar tax with a $5000/year cheque to each poor voter
    * Raw ore export tax
    * LNG export tax
    * Raise the luxury car tax to 50%
    * Land tax or tap water tax

  2. There already is an inheritance tax on super isn’t there?

    If you die before you spend your super,there is a top up tax (reflecting the fact that it was only concessionally taxed during your life because it was meant to look after you in your old age). Perhaps someone like Peachy could confirm.

    • Damien KlassenMEMBER

      There are top-ups on tax in super if you pass it on. But its complicated, not well understood and the ATO has changed rules a few times to stop people from skirting the extra taxes.
      I’m interested in an “out in the open” policy rather than a backdoor one.

      • Yes, the idea of the top up tax is to recoup back some of the generous tax discount the pensioner has already received that will now go to the younger children instead.

  3. I have discussed with my friends that an inheritance tax is a necessary component of a merit based and democratic society since it means that each generation the game is reset and families do not turn into feudal dynasties with too much power. They are aghast at the idea.

    • Scott, what were your friends aghast about? Losing any ill gotten gain to greater good? Or the thought that we should live in a merit based democratic society? I’d get other friends.
      In a world which has created way too much money by creating debt for future generations to repay, an inheritance tax is an absolute must for society to stay cohesive.

      • They considered it socialism/communism and said that they worked hard so that their kids could have a comfortable life.

      • Haha. After I’d written that I saw that easypete had said the exact same thing.

      • Tassie TomMEMBER

        They’re probably relying on every cent of their inheritance to pay off their house.

  4. The problem with an inheritance tax is that, unless every other country in the world does it as well, it is too easy to avoid for those with money.

  5. Small typo:

    In my experience Australian’s have 3

    should read

    In my experience Australians have 3… (no apostrophe – it’s plural, not a verb contraction or genitive)

  6. The thing that everybody has against it is they frame it as “I worked hard for my money; it’s my right to pass it all on to my kids”, which is true. But they are only looking at it from a me me me pov (standard boomer logic), instead of as a whole of society.

    There are also some issues with things like farming or the family business being passed down; you can’t necessarily take half the farm in tax then expect it to be productive and support a family. But there could be exemptions – these aren’t unsolvable issues.

    What people seem to forget is that say they amass a $6m fortune. They want to pass it to their three kids. Great. Now here’s the thing: the kids need to understand that daddy got rich off the labor of Australians, supported by Public infrastructure. His commercial deals were enforced by the judicial system. And so on. Sorry kids, but we’re taking half of it back. You won’t starve on $1m each. And the rest is being reabsorbed back into the system to stop you from deploying capital and concentrating power, which happens in capital societies where return on capital is greater than growth of economy (thanks Piketty).

    And with that money, we will use it to educate and give the opportunity to the next shining star pupil who might have otherwise been a toilet cleaner, to give every person possible the upbringing to achieve their highest possible potential.

    It’s still a free market capitalist system, but we clip the poppies and put it down as fertiliser to promote the next poppy to grow unexpectedly before we clip that too.

    • “”these aren’t unsolvable issues.””
      I have not seen ANYONE detail how the issues can be solved.

      “”the kids need to understand that daddy got rich off the labor of Australians, supported by Public infrastructure. His commercial deals were enforced by the judicial system””
      This is the sort of simplistic BS that seems to be resorted to quite commonly. May the old man got rich working his arse off in some godforsaken corner of Australia that people who live in cities don’t want to go anywhere near except in an air-conditioned Winnebago! Maybe the old man had his house mortgage hanging over his head most of his life to support a business that employed people. Maybe he nearly lost it a few times in his life and during those times he worked 100 hours a week just to stay afloat.
      Maybe the old man worked and saved and skimped while the rest went out and bought flash SUV’s and boats!
      Maybe the old man worked and sweated in the heat and now some shiny arsed public servant who has never sweated ikn his life and spends all his time between an air-conditioned office and his air-conditioned car and now is going to walk in and invade the privacy of his home and family.
      Maybe we ought to start to value prudence rather than think we are entitled to just walk into that person’s home and start throwing threats around. – You don’t think that’s how it goes? Ever lived under this Death Duties crap? The people who get to enforce it are the very people who want to destroy anyone who has worked and saved. They don’t have an effing clue about actually working and saving

      • Gra ManMEMBER

        @flawes. Settle down. We sure need rules to protect hard workers BUT if there is too much money every dollar is tainted and sadly the only way to take back from rent seekers and non-productive asset investors is to take back some of every dollar.

        You should treat yourself to something nice.

      • flawse,

        If my memory serves me right you were a farmer once and I’m guessing that your example is you. I haven’t known too many farmers (3) all inherited their farms and all did it pretty easy work wise, and everything toy you can think off. All 3 sold their farms and retired on multi millions. Not saying that’s always the case.

      • “But they are only looking at it from a me me me pov (standard boomer logic), instead of as a whole of society.”

        flawse, Whilst your POV is right, (that’s exactly how I would feel) from a society wide viewpoint, death taxes are essential for maintaining equality across generations. There are no ‘greater goods’ when old money is concerned, only selfish undeserved indulgence.

    • Your argument supports the concept of tax, but I find it unconvincing as justification for taxing super as inheritance. Super isn’t like normal money. I’m fine with the super collecting the rest of its tax upon receipt as it does now (mainly because it doesnt affect me and is what is already there) but if you want extra money taken out just because the recipient died before they could spend it all, screw that. Super isnt like other money. It has so many restrictions and controls on it, and plenty of ticket clipping too. No option to put it under the mattress. No sir. Gotta pay some company a fee to manage the funds, or go self-managed and pay compliance fees. And the fear is always there that the government will just take it or funnel it somewhere else on a whim to cover their own arses.

      No, consider the foregone tax on inherited super to be the fee the government pays for having not only had that much power over someone else’s earnings in the first place, but also for the money the government has saved by not having to have paid out pension.

      • RubiconMEMBER

        Huh, Fekname?? There is no compulsion to put in more than the mandated minimum into Super. And once eligible to access it, if satisfying an appropriate condition of release, one can withdraw the lot and hide it under the mattress. So it is not trapped there.

        No one forces people to avail themselves of the extremely generous tax and estate planning benefits of the super system. Were you aware that one could be declared bankrupt, yet still retain all their super? You obviously are aware of the tax distortions applicable to super investments; it is a rort. So some clawback on death is reasonable.

        As silly as it may sound, the old RBL super regime was a fairer system. And don’t worry, they are making it harder for you to get vast amount in there in the future….so you won’t have the boomers problem of having your tens of millions trapped in the system!

    • Ronin8317MEMBER

      The inheritance tax is originally designed to prevent the establishment of an ultra rich bourgeois class who can use their wealth to influrnce government(Packer Murdoch, Pratt, Rinehart, etc): it didn’t work, and it is very easy to get around. That means the people who would be paying it are only those who die unexpectedly, or those not rich enough to employ estate planning lawyers.

    • DominicMEMBER

      That’s a very sugar-coated view of the world. The real world works like this:

      The government finds 1000 different ways to tax it’s citizens and then, in the process of providing all the needed services, also wastes a gargantuan amount of this moola on pet projects with dubious merit (NBN, anyone?), lavishes tax-payer cash on favoured parties/organisations i.e. picks winners and losers (which you, the tax-payer has no say on) and sends our army and airforce to far-flung lands to engage in very expensive military campaigns whose basis is highly dubious (unless you think the utter ruin of other countries and the slaughter thousands of innocents is justified).

      If the world worked as you suggest, I’d imagine people might be far more amenable to the idea of all these taxes, but in the circumstances I have a lot of sympathy with those who resist them. If taxation were properly limited the government would actually have to live within its means, which would be a good thing, but the reality is the tax-payer slush fund is nothing more than a vast, easily replenishable trough at which various parasites and zombies sustain themselves, while the rest of us are told to ‘make do’ with whatever bones are thrown our way.

  7. Just a minor point. Originally Death Duties were replaced by the CGT.
    The survey is too simple to comment on as are most conversations regarding Death Duties.
    It’s probably hard for people to comment if you haven’t lived under the Death Duties regime.

  8. sydboy007MEMBER

    there’s so much other tax reform you can do that will be easier to get public support on.

    I think once the current boomers start to fall off their perches and the millennials and zees move into their 30s and are still renting then the idea of a death tax will get more support as more will understand how locked out of the game they are and there needs to be a transfer from the victors of capitalism if you want to keep the game running for the long term. Let the gini coefficient get too extreme within a country and you turn into a Brazil where to be rich means living in gated communities and under the fear of attack when you leave.

    • The Traveling Wilbur

      It’s not “zees”. It’s “oughts”. As in, ought to get a job and ought to stop spending my money on haircuts and ought to move out of my house ASAP.

      ; )

  9. There is a tax on superannuation money. The only exceptions are for a dependant (spouse or dependant child). If the funds go to anyone else (eg independent children) then tax is paid. Don’t have the rates with me but significant.

    • RubiconMEMBER

      Yes…tax only paid by non tax dependants AND only on the taxable portion of the balance. The tax free portion is received tax free.
      The tax free portion is that which would have been non-concessional contributions. Also a withdraw and recontribution strategy would have maximised the tax free proportion of their fund. Once a pension is commenced, the tax free and taxable components are fixed for the life of that pension. Normally earnings accrue to the taxable portion, but not in pension phase.

  10. Death tax currently too easy for the rich to circumvent. I will make the following predictions:
    1) National cryptocurrency to replace cash. This will empower governments to trace all monetary transactions.
    2) Capital controls. e.g. tax on large offshore transfers, ban conversion to bitcoin etc or other currencies.

    Only then will you see wealth taxes applied in earnest.

    Whilst talking electronic currency, I will also throw this prediction out there:
    3) A new form of currency debasement. Once everything is priced electronically, the government will have the power to implement alternative currency debasement. It could be in many new forms such as legislated inflation (e.g. all wages and costs rising simultaneously), or a modern day QE with money proportionately distributed in an instant.

    • Try that and we would become a banana Republic in short order. That would mean Australians can’t invest overseas, and stop wealth flowing into the country. It would also result in two exchange rates – the official exchange rate, and the unofficial one that people are prepared to pay for less traceable money.

      • It won’t just be Australia doing it. Consider that we currently have a global race to zero for taxes and all the major governments are scheming on how to force people to pay their fair share of taxes.

  11. Inheritance tax on the rich, maybe. That money has already been taxed (or should have been). It should all come out in the wash… if everyone is hit equally?

  12. Terror Australis

    There is no justifiable reason why anyone who has won the “genetic lottery” of being born to wealthy parents should get tax free windfall.

  13. crap survey, get some feedback first before you draw the lines.
    At some stage Governments need to stop taxing the rich, and apply tax more evenly such as a flat rate, otherwise we will all pss off to Singapore.

  14. What about a death tax that recoupes all DSS benefits a person has gained over their life, from their remaining estate.
    Seems very reasonable..

  15. dissonanceMEMBER

    As far as I can tell all mature societies throughout history end up with a haves and have-nots class system, be it feudal, landed gentry, old money or simply corrupt power and nepotism. The laws of compounding wealth and the fact generally money makes money means that once a ‘young’ society develops enough that one group has control of the majority of the wealth it stays that way.

    Australia and USA over the first couple hundred years of western occupation are examples of how things work from inception, Russia and China is an example of how things work from a re-set. My issue is that once the class divide is set, those born the wrong side have very little chance of moving up while the ones born the right side can sit on their ass with little chance of falling down (well falling is always easier than rising anyway).

    That is not the society I support. I would like to see every generation with a decent chance of rising to some level of wealth without being penalised too badly for being born to poor parents. Likewise, children to wealthy parents should not have a trust fund given right to lord it over society without making any effort. I do not suggest taking it all away from children of successful and wealthy parents but society would be much better off as a whole with considerable ‘wealth recycling’ .

    Aside from the obvious benefit of less taxation pressure on the working poor trying to rise into something better, it would encourage the wealthy to spend more before they die which can only be good for the economy. Crocodile tears for the children of wealthy parents who expect it all give to them on a platter without having to work harder.

    I started off poor, worked hard and made very good money so I am not talking my own book. If everyone else had to pay death duties then I’m in and my daughter will have to get by with less. What is wrong with a a meritocratic society anyway?

    • Yes exactly this. People who are foaming at the mouth defending the money they made working 80hr weeks probably don’t realise that if money were recycled better they wouldn’t have to be working those 80hr work weeks to begin with in such a system. And no it’s not an 80hr work week that makes somebody millions of dollars. It’s society (other people’s labor, etc). The difference between 40 and 80hr week is 100-200k worth of labor in a capitalist system. Shit, make the limit $2m (nobody will reach on personal labor alone).

  16. Nick the GreekMEMBER

    **** off hippy. Death taxes are double taxation, we need less tax not more.

  17. Tassie TomMEMBER

    I made a few comments yesterday (which I mostly got panned for).

    I totally agree that capital needs to be taxed. This is because the return on capital (at least 5%pa – think about super fund growth) is greater than the rate of increase in wages (currently 1-2%pa). The outcome of this is that the people who own the capital to start with will continue to get wealthier relative to the people earning wages and trying to accumulate capital, and the rich-poor divide will continue to widen and it will do so based on your family’s wealth rather than education, effort, and merit.

    My opinion is that a broad-based tax on all wealth (including but not limited to land, improvements on land including PPOR, water rights, shares, superannuation, trusts, bank accounts, and foreign capital in Australia) would be a simpler and more effective method than an inheritance tax. My suggestion was 1%pa. This is still well under what invested capital would be expect to grow by (as opposed to consumption capital such as the PPOR).

    If combined with a universal basic income it need not have a threshold – if UBI was $20,000pa then it could be said that anyone with less than $2,000,000 is receiving money from the government rather than paying wealth tax.

  18. As someone who is likely to benefit from the absence of inheritance taxes, I think they make sense in theory but fall apart in practice.

  19. Don’t get me wrong, I will get out my pitchfork against the rich on the best of days (especially those that grow fat from interest and financial dealings) and I understand the appeal of the whole meritocratic blank-slate-at-birth society. It’s got that same Georgist groove to it- “well if you don’t work for it, it shouldn’t be yours”. But like Georgism there’s gotta be some catches somewhere. there are three issues that come to mind. Not deal breakers per se, but things that need to be examined.

    1. We don’t seem to fully fathom the consequences of gutting wealth. For instance, it’s a flow of money that potentially can be used by the youngin to enterprise. I like the idea of funding all these little poppy seeds to grow into the new poppies, but in practice I am skeptical the fiscal fertiliser ever finds its way to them. I remember the first time I realised the government had grants for a whole lot of everything – when I was working for a business and they wanted me to hunt out tenders/grants/exemptions!

    Given that, why limit ventures to some those who can more easily access funding? Darren of Anecdotesville might not have the strategic bullshitting skills to apply for a grant to expand his auto shop into custom decal printing, but he sure as hell knows how to spend inheritance that lands in the bank. Put simply, the every day ‘mediocre’ person getting that inheritance windfall might just be able to do something decent with it. Even if the vast majority spend it all on beer and jetboats (or repaying mortgages, lol), the potential for the rest to make new businesses or otherwise invest the money is pretty wild.

    On a related note- Charles Darwin, by all accounts a useless boy – uni dropout and all that, lived on daddy’s money. Without that he would have never gone on that famed 5 year boat journey and contributed as he did to the theory of evolution.
    Granted, you might say “well the fiscal teat for such dreamy sorts to suckle on already exists, and it’s called academia”, well you’ve got a point there.

    One might also argue for something that’s more equitable than inheritance- some sort of universal basic capital, so that the have-nots can get their funding too.

    2. The implementation won’t be all its cracked up to be (i.e. people want to stop dynastic wealth yet all that happens is the erosion of the middle class and somewhat wealthy dynasties, and the ultra-rich keep on chugging).

    3. Similar to point 2, It’s another great way for short-sighted bureaucrats to implement policies that f*** over the family farm, the family business (and other [u]productive[/u] estates) and ensure that there’s a big incentive to corporatise- farm inheritance is enough of a headache already. Ultimately that would be a loss for society. This is pretty easily solved with exceptions.

    TL;DR like most things the governments say, it’s a good idea but never underestimate their ability to make it shitty. lmao.

  20. That is a shocking description of franking credits – and entirely misses the point why we have them. Either Damian doesn’t understand the benefits (which I know he does – I have used one of his models) – or that he is purposely misrepresenting the net benefit!

  21. Rather than a UK-style tax on estates, I think the _recipients_ of inheritances should be taxed. It could just be treated as income and dealt with through the normal income tax system, or there could be a (per-person, lifetime) tax-free allowance for gifts and inheritances. (Here I follow Atkinson’s suggestion in _Inequality: What Can be Done?_