Opinion

James Boyce
The case for a death tax

The reason Australia doesn’t have a death tax – when almost every other developed nation does – can be traced back 40 years to a fear that old people would move to the Gold Coast to avoid paying one. On such absurd grounds, Australia has forfeited hundreds of billions of dollars and inequality has deepened.

Yet the idea of this tax has become so politically toxic that the threat of it – unsupported by any policy position – was used in the campaign against Bill Shorten at the last election. Perhaps now, with coronavirus remaking the country, we can have a serious conversation about how an equitable inheritance tax can help rebuild the country.

The principle that the state has a right to a portion of the estate of the wealthy after they die was established in England in the late 17th century. Its practical application helped defeat Napoleon. Imperial mimicry ensured that estate taxes were a well-established component of the revenue streams of every Australian colony at the time of Federation. From 1914, the Commonwealth added its own tax on the wealthy dead to help pay for the war. For more than 60 years, the death duties flowing into state and federal coffers helped subsidise major health, education and welfare reforms.

Estate or inheritance taxes remain in Britain, the United States and most European countries. They are widely supported by progressive and orthodox economists, left- and right-wing politicians, and voters from across the political spectrum. Australia stands almost alone in both abolishing and vilifying them.

Why was the decision made to allow the small group of people who control most of the country’s wealth to transfer their riches untaxed to an equally small group of already privileged, mostly older and invariably rich descendants? The initiator of this major tax reform, unsupported by expert input, was the infamous premier of Queensland from 1968 to 1987, Joh Bjelke-Petersen. As with so much about Sir Joh, it was driven by cronyism and populism.

The argument in favour of the equity, efficiency and justice of having some form of tax on large estates is so strong that it is rarely disputed outside of populist forums. But the dread associated with taxing the dead was on full display in a misinformation campaign against “Labor’s death tax” during the last election. This was fuelled by Treasurer Josh Frydenberg’s claim that, “Given Labor is already proposing to tax Australians from the cradle to the grave, it is certainly not out of the question that Labor would consider taxing people beyond the grave.”

This hysteria had its roots in the 1970s campaign against death duties, which were then in urgent need of reform. The failure to properly index the thresholds at which the tax applied meant they were being increasingly imposed on mainstream estates. Meanwhile, the super-rich were being allowed to avoid payment through the usual creativity of their accountants. Farmers and other family businesses of high value but small margins feared having to sell up. The net effect was that the tax was generating less revenue and more anxiety than it had in earlier generations.

Sensible reforms could have addressed these issues. But before they could be implemented, Bjelke-Petersen announced the abolition of death duties, a measure that came into force in Queensland in 1978. Within six years, all other premiers followed suit, supposedly concerned that their elderly would otherwise retire to the Sunshine State. Malcolm Fraser, who was then prime minister, joined the party by abolishing the Commonwealth tax in 1979. Treasury economists Sam Reinhardt and Lee Steel pointed out in 2006 that the total abolition of death duties in Australia by 1984 occurred “despite various tax review committees recommending refinements to improve the equity, efficiency and simplicity of the tax”. No review supported abolition.

Even in their weakened end-of-life condition, estate taxes accounted for about 10 per cent of state governments’ total taxation revenue. Their abolition along with the associated gift taxes – for obvious reasons any form of inheritance tax requires a parallel one that captures large transfers made before death – left a big hole in state finances. It was this revenue shortfall, at a time of increasing pressure on health and community services, that largely explains the world-leading liberalisation of gambling laws in Australian states and territories during the 1980s, which soon led to Australians becoming the biggest gamblers on Earth.

The state-sponsored proliferation of poker machines generated revenues similar to death taxes, but paid largely by the living poor. These revenues came with the harm associated with problem gambling, including enormous additional costs on state-funded health, housing and emergency relief services. Essentially, the tax burden was transferred to the most vulnerable, and did such harm as to cost the state vastly more in support.

A policy consensus about the desirability of reintroducing some form of inheritance tax has been building among economists, largely because the growing wealth inequality in Australia has both social justice implications and serious economic ones. The inefficiency and inequity of the concentration of wealth also compounds the problem of intergenerational inequality, which will see younger generations of Australians becoming the first in the nation’s history to be worse off than their parents. The most straightforward way to address this is an inheritance tax, as it has the least impact on consumption, investment choices or retirement income. A windfall bequest bears no relationship to economic effort and thus has no impact on productivity. Research has shown most of the assets in large estates have never been taxed through capital gains or income systems. Rather, wealth concentration in Australia has been exacerbated by tax exemptions largely benefiting a privileged few.

The Henry tax review acknowledged the arguments in favour of what they termed a “bequest” tax, but did not pursue it because of its “controversial history”. Recently, the OECD encouraged governments to look seriously at estate taxes. In 2018, a policy paper by the Australian Institute for Business and Economics at the University of Queensland strongly supported their reintroduction. This report built on an earlier one undertaken by Andrew Leigh and his then Australian National University colleagues that concluded there was “a strong case to be made that inheritance taxes are more efficient than other forms of taxation”.

Every proponent acknowledges that the issues that caused problems in the 1970s must be addressed. But compared with the complexities associated with other forms of tax, this is not a difficult task. The sheer scale of the wealth now held by the richest Australians means thresholds can be set high enough to leave almost everyone unencumbered while still generating very significant revenue. A threshold of about $4 million would only affect about 3 per cent of households. It would also mean the chosen image of fearmongers – a grieving widow encumbered with complex debts owed to an uncaring state – would be neutralised. The lawyers and accountants engaged by high net wealth individuals would simply pay the Australian Taxation Office from the estate, as they would any other creditor. Furthermore, exemptions for family farms and small business transfers should not be difficult to put in place – avoidance attempts can be countered if the government chooses to do so, and if the Commonwealth takes a lead role in policy change, no rogue state can undermine reform. To achieve crucial popular support, revenue could be targeted at popular forms of expenditure.

Coronavirus has created the conditions where new forms of tax are not just politically possible but unavoidable. It is not only a matter of servicing the debt: the public health crisis has exposed the glaring inadequacies in the aged-care and health systems, welfare support and labour market. Fixing the country will cost money. Most Australians will recognise that the assumption that this should be provided by younger workers already bearing the largest burden of personal and national debt is preposterous.

For a death tax to achieve political traction, it will need to be older Australians who strongly advocate it. Far from new taxes dividing citizens, as the prime minister claims, the knowledge that we can give back to the living after we die and reduce the burden on those seeking to build a quality of life similar to what we enjoyed can be a consolation in older years. The pandemic has confirmed that Australians are not driven only by selfish gain, but by an appreciation of the obligations we have to each other. A death tax – let’s call it by the name people most fear – is one step towards rebuilding a compassionate society. It’s time to confine the costly legacy of Sir Joh to the grave.

This article was first published in the print edition of The Saturday Paper on Sep 5, 2020 as "The case for a death tax".

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James Boyce is the author of the multi-award-winning book 1835: The Founding of Melbourne and the Conquest of Australia.