Wealth for Toil: Why Australia Needs an Inheritance Tax
It was not that long ago that inheritance tax was both unthinkable and unnecessary in Australia. Ours was a land of opportunity where every person who worked hard and saved their money could afford to own their own home and live comfortably in retirement. A good inheritance was a windfall, but not a prerequisite for financial security. Regrettably, this is no longer the case. We are facing the same problem our motherland Britain faced centuries ago: a society so unequal in wealth that family connections are the sole determinant of property ownership: the so called “Jane Austen society”.
Australia taxes incomes heavily and wealth lightly. It is a system designed in the Menzies era to reward and incentivise home ownership and for a long time it was incredibly successful, with home ownership climbing to 70% in the early 70s. But a perverse reversal happens when homes start to become unaffordable - the same policies that gave birth to the Australian Dream work to undermine it. The tax advantages of home ownership (an asset that is neither taxed for capital gains nor the ongoing economic benefits it provides its owner) are no longer an incentive available for all hard-working Australians – they are exclusive to those who can afford to buy a house, i.e. those born or marrying into a wealthy family. Rather than giving everyone a boost, they help only those fortunate enough to be in a position to buy. Put simply, current policies help to grow existing wealth but hinder the creation of new wealth.
High prices are what make it hard to afford a house, but the task is made virtually impossible by three government impositions on young families: high income tax, high HECS repayment rates and stamp duty. Stamp duty means a family saving a deposit for a median priced house starts at minus $50,000. The average rate of income tax paid by Australian families (18%) is much greater than the OECD average (14.2%) and combined with HECS repayments make saving a deposit nearly impossible. As I have argued previously, HECS should come out of a person’s deceased estate, or at least be deferrable until they meet an asset test: deposit first, then HECS.
Inheritance tax may to some Liberals still be unthinkable, but it is no longer unnecessary. The value of wealth transfers is around $150 billion per year and growing. A tax of 20% would be enough to do away with stamp duty altogether, or it could fund income tax cuts or other schemes to help first home buyers. The truth is that we are living longer, and the people who receive inheritances are generally fairly wealthy themselves. How can we justify taxing working Australian families higher than most other countries, yet reject out of hand the perfectly reasonable option of an inheritance tax?
The arguments against inheritance tax are that it’s a double taxation, it’s prone to loopholes and that it punishes prudent financial management and ‘aspiration’. Let’s look at all three. While it is a double taxation, this is offset by the fact that most Australians’ wealth has not come from saving their post-tax income, but from tax-free capital gains on their family home. Inheritance tax may be prone to loopholes, but so is every other tax and this has not stopped the UK raising £7 billion in inheritance tax last year. In fact, there are administrative advantages due to the fact the tax is levied infrequently. Finally, arguing that it punishes saving and aspiration may be true, but by making the rate low and broad-based, the effect is minimised. A company tax rate of 30% does not stop companies making profits and a marginal income tax rate of 45% does not stop people earning good incomes. Surely a 10-20% inheritance tax won’t deter people from saving.
We are facing the grim prospect of Australia becoming a two-tiered society, with a class of property owners building ever increasing wealth and a class of working tenants with no prospect of ever owning their own home. As Liberals, we are the party of aspiration and reward for effort. Getting rich off a government underwritten property boom and keeping that wealth in your family is not the kind of aspiration we should be championing. Instead, we should be championing wealth for toil – we can do this by changing the tax system so that hard working families keep more of their earnings and the recipients of massive, tax-free windfalls contribute their fair share.