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Epilogue: Death duties, where angels fear to tread

Not unexpectedly, my November 2013 Cuffelinks article suggesting that death duties be considered as a public finance tool attracted some strong criticism. I am grateful for all the comments. In retrospect, I concede the label ‘death duties’ would repel many. A more accurate description would be ‘inheritance tax’. I had meant the terms interchangeably.

My responses to the comments are in italics below:

  • They complicate asset-rich family business succession through forced sales. Multiple deaths during a short period are even worse.

As pointed out in the comments, insurance is the obvious solution. Accrual accounting will treat the related cost as an ongoing business expense, amortised as net worth is built up.  This is no different really from the way family needs would be financed pursuant to the breadwinner’s death: insurance or asset sales. With prudent planning, fire sales can be avoided through holding a proportion of liquid assets. 

  • It is an appalling tax, as elders will worry about it in their twilight years. Pre-empting it during one’s lifetime by gifts risks leaving the donor without money, or dependent on recipients. A harrowing example of the commentator’s great grandmother was cited.

As I had explained, the dead cannot be taxed, only those left living. Individual examples are always painful. Those who accumulate wealth would be accustomed to taxes on income, and most cope by only considering the post tax component for meeting their commitments (e.g., a worker focusing not on gross but net cash flow). The taxation of capital gains is similar, when an investor would take into consideration the net-of-tax gain.

  • Superannuation imposes inheritance tax indirectly, by levying 15% (plus medicare) on benefits paid to non-dependents such as adult children. The tax can be avoided by paying the benefits during the member’s lifetime.

I am unsure if this is an argument for (‘we already have it, so why the fuss?’) or against (‘shock horror, the dreaded tax lurks in unlikely corners’). Regardless, for inheritance tax to be effective and fair, it should be accompanied by suitable anti-avoidance measures. Circumvention through prior gifting would be obvious. Centrelink already claws back certain gifts in calculating age pension. 

  • The dichotomy inherent in taxing earned income in full, capital gains in part but exempting gambling and inheritance is inequitable.

To encourage a strong work ethic, as a principle, unearned income (inheritance, gambling and capital gains) should be in principle taxed in preference to earned income from personal exertion. The current attitude towards inheritance tax offends the principle. The worsening dependency ratio (workers to total population) demands a review, to transmit appropriate behavioural signals.

To sum up, a strong case against considering the tax has not been made as the economy balances the many competing factors on the demand and supply side. Any introduction has to be tested against real income, capacity to pay, progressiveness and the inevitable challenges of transition. I adored the suggestion that death duties give an extra incentive for living longer. Researchers, take note. The economies of the world struggling with improving longevity have now stumbled upon the ‘killer’ rationale – literally speaking - for introducing an inheritance tax.

Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds.

3 Comments
Carol
January 24, 2014

I support inheritance tax. I live in a middle class neighbourhood and some of my children's contemporaries will inherit two sizable generational nest eggs of property and other assetts before they reach retirement age. Less 'well born' people will have to work and budget for thirty or fourty years to provide for themselves the sort of retirement income the 'well born' will simply have land in their laps - tax free. So the less lucky members of society will have all their earnings taxed, while the 'well born' will not be asked to pay tax on money they inherit.

This money also ends up resting largely in the already large bank accounts of the over fifties. Most will inherit when they are at this age and already have large bank accounts. The over fifties tend to save their money ( so it is not working productively in the economy), or many now are spending it on endless overseas holidays - so that it is not circulating through the economy here. So the money itself contributes less than it might to the economy. It would benefit the economy to have at least 15 - 20 % circulating through it if it was taxed and recirculated here.

I say this as someone who will inherit about half a million dollars when the eighty plus year old parents pass. I pay tax on my salary, I pay tax on my superannuation, so why is the free money of an inheritance treated so favourably?

Richard
January 26, 2014

Simple answer is - because the tax has already been paid. This is really a much more complicated debate than can be handled here, for instance what about the many Australians that build a family business - and in the event of the death of a family member tax must be paid - how to value the business - sell it or value it, then where does the tax come from to - sell it? What about farmers, sitting on productive land that mostly makes little profit (Why is a another long story), again they would likely have to sell (part of) it - sometimes to less productive hobby farmers - having a double whammy on our economy - taxing just because of the death of a person and contributing to reduced productivity by forcing breakup of assets.
Due to the over inflated price of Sydney housing these days, unless I leave some form of legacy for my children - to buy in Sydney, they will start life with so much debt I am concerned we will drive too much risk aversion into our economy and people will not take a chance to build their own businesses and innovate.
I have had the pleasure of working with rich and poor and I have come to the conclusion it is not the size of the inheritance that makes a person. I am proud of the fact that my father left me something, I have invested it (sometimes spent some and sometimes topped it up) and I plan to pass it to my children. I do not see this as a waste and hence tax should be paid on it.
One could say it is more productive than sending my children out in their 20's or is it 30's! to secure a huge debt to banks to pay off huge mortgages for next 30 or more years.
Some people do waste money, some have businesses and some have properties. Inheritance tax does not drive productivity - it just shifts wealth to the government - to do what?
They got rid of Wealth Tax years ago - I am one that would suggest for the majority of Australians it is not the answer to our many problems.

Ramani
February 07, 2014

There could be a logical defence against inheritance tax. But 'because tax is already paid' is not one.

When I receive my wage, I pay tax. This net amount is spent on consumables (which in turn levy tax), and the traders then pay tax on profits. Cascade is a tax reality. The puristic distaste of double tax does not work in practice.

The purported troubles of business, agriculture etc in coping with the tax by having to sell are problems of plenty, being trivial relative to the poor wage earner subject to PAYG tax at source. If pain of payment is a valid reason to eschew taxation, then all taxes will have to go.

As the dead taxpayer is free from all materialistic obligation such as tax, and it is the progeny / inheritors who pay inheritance tax, the presumed identity between the previous and subsequent payers is an illusion.

The final assertion 'it goes to the government' works the other way, by denying the substantial fiscal identity between the Government and citizenry. It emphatically settles the issue. Strip away the agency risk and pipeline wastage, the government is us!

Inheritance (or wealth / gift) tax may be blasphemous to some. But historically, blasphemy has been a useful step towards innovation and unsettling the status quo. Thankfully, burning at stake is so Joan of Arc!

 

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