Momentum builds for an inheritance tax

Momentum is slowly building for Australia to follow other advanced nations and implement a modest inheritance tax.

Over recent months, multiple media reports have emerged supporting the idea.

The latest salvo comes from a new paper published by the Tax Institute, which raises the option of a 5% inheritance tax on amounts over $2.5 million:

It is estimated that over the next two decades, Australians over 60 years of age will transfer $3.5tr in wealth. Notably, around 78% of the estimated wealth transferred will go to roughly 20% of recipients. This indicates that there is significant inequality in Australia with respect to wealth, and this inequality manifests itself in the realm of inheritance…

Estate taxes were first introduced in the form of probate duties (a tax on property passing by will) charged by courts in the early part of the nineteenth century in New South Wales. By 1901 estate taxes had been adopted by all of the colonies….

By the 1970s pressure for estate duty concessions had gradually reduced the tax base. In the end, state tax competition led to the abrupt demise of estate duties…

The federal government also abolished its estate and gift duties in 1979. By 1984 all estate duties had been removed, both state and federal. This occurred despite various tax review committees recommending refinements to improve the equity, efficiency and simplicity of the tax.

This history, and the state of the economy post-COVID-19 necessitating new sources of revenue, is the basis for a healthy discussion as to the merit of introducing a wealth transfer tax in Australia…

In furtherance of that argument, the policy intent underpinning the introduction of a wealth transfer tax would be to minimise that wealth inequality and simultaneously boost government revenue…

It is our opinion that any rate set should be relatively low as compared to other taxes, for example, 5% above a certain threshold of, say, $2.5m or another reasonable amount. This would appropriately account for other taxes already collected during an individual’s lifetime.

The Treasury’s Retirement Income Review, published late last year, touched on some of these issues, noting that “superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059”:

Superannuation death benefits

Superannuation death benefits are projected to soar.

My view is that inheritances will increase inequalities between people with richer or poorer parents. Therefore, now is the ideal time to implement a modest inheritance tax.

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).

Death taxes

Death taxes are common in other developed nations.

The Henry Tax Review 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… 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…

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.

The Grattan Institute has also given its support to an inheritance tax:

The wealthiest 20 per cent of Australians get 38 per cent of inheritance money; the poorest 20 per cent get only 8 per cent.

It means the growing wealth of Baby Boomers is likely to end up concentrated in the hands of a select group relatively well-off Generation Xers and Millennials rather than being widely spread…

Australia is one of only seven OECD countries without any inheritance, estate or gift taxes…

Given the growing pressures on the federal budget as the population ages, it is appropriate to at least place an inheritance tax on the Budget reform agenda.

Unconventional Economist
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