The idea that death duties are politically impossible in Australia has become an article of faith. But if given a choice, wouldn’t people prefer to be taxed less when they are alive in exchange for paying a bit more when they are dead? With the GST gone from the discussion perhaps it’s not naive to suggest that we can actually begin to have a real tax debate, where everything is actually on the table.
For too long tax reform was seen to be only possible via the GST. Despite its proponents demanding that if you weren’t a supporter of the GST you weren’t really debating tax reform, the opposite became true.
The GST discussion acted like a barrier to other more important tax debates. The discussion about estate taxes (death duties) has been an example of that. Even a modest estate tax exempting everything up to $2 million and imposing rates 20% thereafter and 30% above $10 million might generate $5 billion per year according to calculations we have released in our report today.
The estate duty is useful because it is levied at a time when the one who accumulated the assets no longer needs them and the beneficiaries have not gotten used to owning them.
The Henry review suggests an estate duty would be efficient and would help address inequality while also ensuring more of the likely recipients participate in the labour market. All but four OECD countries impose estate duties (the exceptions are Australia, Canada, Mexico and Slovak Republic). Henry projects that bequests are likely to rise to around $85 billion, or 4% of GDP, by 2030. The Henry review showed some countries raise up to 1.4% of their revenue from estate duties. In Australia’s case, that would translate to around $5.5 billion per annum.
An estate tax could also allow the abolition of some small, inefficient taxes and replace that revenue with a tax on a growing base of economic activity — death. (And unfortunately, it won’t change behaviour by taxing it.)
Estate duties would have the added benefit of addressing income and wealth inequalities that have been growing in Australia. Taxing unearned economic rents via inheritance is not disincentivising anyone from earning while they’re alive.
Indeed the whole superannuation tax concession debate is at least in part a result of Australia’s failure to have in place sensible, modest estate tax or inheritance tax laws. Massive superannuation balances are being accumulated by some people not so they can have an adequate, even generous retirement income but rather as a tax haven investment fund to hand over to their children. The reality is that if Australia had some form of death duty, at least the most egregious superannuation tax rorts would have been limited.
Tim Costello makes a strong case for this policy to be on the table, and also makes the good point that people could avoid paying the tax altogether by donating to their favourite tax-deductible charity.
Of course we’d all like to give our survivors a tax-free inheritance — but by doing so, we’re also ensuring that the lost revenue is paid for by some other tax. They’re going to pay some way — if inheritance is tax-free, that means the government must take a bigger cut of their income, or put higher taxes on everything they buy.
The problem with much of the commentary around the tax debate is the magic pudding fallacy. There’s always a politician ready to tell you that he or she can cut taxes without raising others or cutting essential services. Any time a tax cut is promised, there’s a sting waiting in the tail. At the end of the day we need the maturity to ask ourselves “what taxes do we hate the least?” And would you really rather pay more tax when you’re alive, or more when you’re dead?
Crikey is committed to hosting lively discussions. Help us keep the conversation useful, interesting and welcoming. We aim to publish comments quickly in the interest of promoting robust conversation, but we’re a small team and we deploy filters to protect against legal risk. Occasionally your comment may be held up while we review, but we’re working as fast as we can to keep the conversation rolling.
The Crikey comment section is members-only content. Please subscribe to leave a comment.
The Crikey comment section is members-only content. Please login to leave a comment.