Wednesday, October 2, 2013

Reblogging the Henry Review: The Tax Which Must Not Be Named


Also not a fan of the death(eaters) tax
There are few taxes that are popular with the population at large and it’s a brave politician that tries to levy a new one. But there is one tax that is so unpopular that not even the Henry Review could bring itself to recommend it, despite a plethora of economic benefits. I am of course talking about the inheritance tax.


Despite being a common, if unloved, tax in many countries around the world, including the US and most of the EU, Australia has not had an inheritance tax since it abolished death duties in 1979.

There is no single measure which would better efficiently raise funds while also improving equality. However, despite this the Henry Review refrains from endorsing it outright, instead recommending that the government “should promote further study and community discussion of the [inheritance tax]”. Perhaps this is another example of the Henry review trying to subtly shift the terms of the debate, since at the end of the day any tax reform needs to be driven by the politicians and government. If that's the case however, they've clearly failed.

Two months ago, I eagerly tore open a copy of Andrew Leigh's new book on inequality. Surely if anyway was going to lead the charge on reintroducing an inheritance tax it would be a left-wing, wonky economist-turned-politician who is writing a book on the problem of wealth inequality. Leigh even has form on the issue have previously called for the tax’s re-introduction. However flicking through the index I found that the inheritance tax is barely mentioned at all, and it is completely absent from the chapter on "What is to be done?". Disappointing.

I suppose its absence should not be a surprise. The political case against the inheritance tax is strong; the scare campaigns practically write themselves. Even the Greens have dropped it from their platform (and when a policy is deemed too left wing for even Bob Brown, you have to wonder just how far from the pack you have strayed). People have a deep inbuilt desire to inherit the family home, especially when they have recently lost a family member.

But there ways you could potentially craft an inheritance tax to help ease the burden. Common features of inheritance taxes include a minimum estate size, such that only wealthy families are covered. Or more directly the government could simply exempt the primary residential property from the tax (up to a capped amount). You could also vary the rates which are applied depending on your relationship with the deceased, taxing spouses, and perhaps children, at a lower rate than other family members or friends. In short there are ways to make the tax more palatable.

Regardless of how you structure the tax however, you need to have a discussion within the community first. One would think that if the ‘death-tax’ can survive in the freedom-loving, tax-adverse USA, Australia could also summon the political will to implement an inheritance tax. However, given the lack of debate around the issue however, I suspect we are a long way from seeing its reintroduction.

PS You would obviously need to change the way you regulate family trusts, and potentially include a gift tax, but I think the tax would still be well worth the effort.

PPS  Andrew Leigh is actually talking about his work on inequality this Wednesday night! Hopefully someone will ask him his thoughts on the matter.

3 comments:

  1. Good points. A principal problem for death duties is the constitutional issue - they were levied by the states. So in a typically myopic move, the corrupt Joh Bjelke Petersen (trying to protect his family farm) got rid of them in the 1970s to gain a competitive advantage over other states. This led to an arms race whereby every state got rid of their death (and gift) duties. So an important issue is the Constitutional one - do the Feds have the power to raise this tax? That might be why Henry did not go into it if it was beyond power for the Feds.?? But clearly the death (groan) of death duties is another reason why Federation is a suboptimal solution. We are stuck with it however.

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    1. Don't think there's a constitutional issue. Death duties started as colonial taxes (originally in NSW from 1851). The Fisher Govt introduced a federal inheritance tax during World War I. The federal inheritance tax was abolished after Bjelke-Peterson abolished the QLD one, I'm pretty sure, under Fraser.

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    2. Thanks Thomas. I did not know about the Fisher governments tax. So it sounds like it is a goer constitutionally. Bjelke-Peterson must have started a political bun rush with his reform.

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