If advocating additional taxation is unpopular with the public, little provokes as much antagonism as the mere mention of death duties. In Australia, it is a truism that any leader contemplating death duties must be morbid, endowed with a fetish for political suicide.
I believe it is time to question this superstition. Holy cows need periodical poking in the ribs, however anathematic to the faithful.
Government revenue growth must come from somewhere
Given the outlook for budget deficit, global uncertainties and political point-scoring about ‘the other side’s tax grab’, treasurers and civil servants have been forced to conjure up incremental measures from a list of possibilities of diminishing utility. In superannuation, the superannuation surcharge (which its architect Costello later contritely despised), the complex contribution caps and the proposed taxation of earnings during pension phase exceeding $100,000 per member come to mind.
It is naive to ignore a potential source that remains untapped for reasons of apathy, inertia or false ideology. The pressure to plug the deficit is unrelenting, while pensioners post 60 receive tax-free benefits from tax-exempt accretion of savings. Social security asset limits ignore the family home, which remains exempt from capital gains tax as the primary residence.
Dislike of death duties
Why the antipathy to death duties? Several reasons suggest themselves:
- Having accumulated assets during life after paying taxes, it seems a double whammy to extract another dose.
- Such taxes will be a disincentive for people to work harder, earn more, prudently save for a rainy day during life and arrange for the eventual care of the family – all attributes of a civilised, as distinct from subsistence, society. Progress and social cohesion depend on them.
- People already suffering from the trauma of the demise of a dear relative do not need the angst of the savings of a productive life, being dissipated by the grasping taxman.
- There is something morbid, redolent of grave digging, in extracting taxes from the dead. Are we that low to pick, hyena-like, on our dead?
On closer scrutiny, many of these legitimate convictions exhibit the classic features of ancient myths no longer relevant in, or affordable to, contemporary society. Consider the following:
- Society incurs a cost in facilitating the orderly enjoyment of accumulated assets, regardless of the owner’s physical existence, and this has to be paid for. Why not seek a contribution from the users? Multiple incidence of taxation is not as uncommon as the argument presumes: for example, consumption of post-tax income is subject to a variety of cascading taxes. Therefore, it is a question of distributing the impost equitably across a range of taxable amounts, including bequests. The larger the taxable base, the better.
- The progressive system of taxation, almost universally preferred, does entail more from the better off, as a proportion of the taxable base. The alternatives (regressive and flat systems) will impose a heavier burden on the lower earners. It is possible to set tax rates such that the desired goals (incentives for work, prudent savings and providing for the family) are balanced against a fair and reasonable levy, without treating the two as mutually exclusive.
- The argument of additional trauma for the family is disingenuous, at best. As long as the tax rate is set unambiguously and administration simple, those remaining can and should consider the net of tax legacy in remembering the deceased. Bequests incur a host of other costs: professional fees, stamp duties, custody and execution charges. No one begrudges them. Inheritance taxes merely conjoin the twin certainties of life in one convenient step.
- Bemoaning the dissipation of wealth upon death ignores hard reality: death deprives humans of all physical possessions. Why pretend inheritance is an exception? The obvious motive is the entitlement mentality of those who remain.
- The conflation of inheritance tax with the purported ill-treatment of the departed conveniently glazes over the fact that in the astral world beyond, the ATO writ does not run. As we find it acceptable to tax the living to foster social order and equity, even if it results in severe hardship to the lower levels of economic strata, it must be a no brainer to ‘tax the dead’.
The arguments for death duties
Putting aside the emotional reaction, there are solid arguments in favour of the tax:
- The criteria for a good tax system are equity, ease of collection, re-distribution of income and wealth, capacity to pay, incentive to earn and efficiency, combined in optimal balance. The imposition of inheritance tax would not offend any of the above.
- Tax avoidance is a major problem that deprives the exchequer of money, time and effort. Given the existing system of distributing deceased estates, it should be relatively easy to guard against abuse, with appropriate recourse against the inherited assets.
- Tax is global in its reach. Those tempted to game the system across national economies because of Australia’s current practices might find it is less advantageous, if the inheritance anomaly is corrected. While this might call for an incremental tweak of the system, it would be worthwhile to preserve equity.
- Most of all, the emerging outlook cries out for a replacement of the current system’s propensity to push funding costs as a future burden on successive unborn generations. Consider unfunded social security and government pensions on the one hand and the need for a government push into long term infrastructure funding (even if it is as a co-investor with other long term investors). There is something amiss in a society that taxes the average worker on incomes of $37,000 per annum, while letting current consumers past their working lives to enjoy tax-free pensions and lump sums, regardless of size, and then able to pass on the balance gross of tax to their offspring. It is neither welfare nor equity.
Ignoring inheritances misses a vital option. In superannuation, the nation is faced with managing longevity as more members move into the pensions phase, free of earnings and benefits tax. We need a circuit breaker, in addition to innovative policy. Inheritance taxes could be the circuit breaker.
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.