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Of death, taxes and silvers spoons: An argument for the inheritance tax’s reinstatement


Solomon Zhang

By

February 10th, 2017


Discussing tax is never popular. Discussing the most unpopular tax? Politically foolhardy. However, with inequality on an upwards trend, it’s time we drop the politics and consider the economic merits of implementing an inheritance tax, writes Solomon Zhang.


According to Benjamin Franklin, there are just two certainties in this world: death and taxes. Ironically, the same cannot be said about the much-debated ‘death tax’, which has experienced wavering political support in recent decades. Its unpopularity has led many countries to completely abolish the tax, with Australia being the first developed country to do so in 1979.[1] However, with the topic of inequality and the wealth gap becoming a staple feature of political debate, it seems that revisiting the prospect of an inheritance tax is well overdue.

So what is the inheritance tax? In simple terms, it is a tax operated by taking a portion of what a person would have inherited from a deceased’s assets and property. This can either operate before the assets and property are distributed (referred to as an estate tax) or after it is distributed to beneficiaries (referred to as an inheritance tax), although the term inheritance tax is often used to encapsulate both forms. The tax is also generally subject to a minimum asset test, which is currently $5.49M USD in the US [2], such that the burden of the tax falls solely on the ‘wealthy’ members of society.

On theoretical grounds, death taxes have been lauded as incredibly efficient by economists and academics alike, with commentators going so far as to describe it as a ‘perfect tax’.[3] This can be attributed to the fact the tax is levied at a point in time where the ones who have accumulated wealth no longer need it and where the beneficiaries have not yet adjusted to owning them.[4] The progressive nature of the tax also sits comfortably with the goals of reducing income and wealth inequality, as revenue raised can be used to subsidise those on the lower end of the socio-economic spectrum, whether through direct tax cuts or through avenues such as education and healthcare.

The basis for an inheritance tax is rooted in egalitarianism; the notion that people are equal in fundamental worth and social status. This school of thought recognises that a genetic roll of the dice is all that separates being born with a silver spoon in one’s mouth versus into poverty. Why then, should a person be completely entitled to the fruits of their parent’s hard work and talent simply because, as economist Irwin Stelzer has put it, they are the ‘lucky winner in the sperm lottery?’[5] Any inheritance left to a deceased’s beneficiaries should therefore be viewed as a windfall gain, born purely of circumstances beyond the beneficiaries’ control. Taxing an inheritance thus acts as a tool to aid social mobility, by mitigating the effects of past generations in determining the success and fortune of current generations. This has become increasingly important in light of the growing wealth and income gap that Australia is experiencing. In fact, Australian social research body, McCrindle, has identified that the most common measure of income inequality, the Gini coefficient, is at its highest historical level of in Australian history.[6] The same study also revealed that the wealthiest 20% of households own, on average, 71 times the number of assets as the bottom 20% of households. Although this may pale in comparison to inequality statistics from countries such as America, this is a trend that simply cannot be ignored.

Ostensibly, it’s not difficult to see why this tax is so politically unpalatable. For many, there is something fundamentally unsettling about interfering with the ability of successful people to provide for their descendants and loved ones. Critics argue that it stifles an incentive to build wealth and therefore contribute to weakening economic growth. It is easy, however, to overlook the progressive nature of the tax, which ensures the ‘ranking’ of each household’s disposable income is preserved. It is also easy to underestimate the nature of our human desire to accumulate; the fact that high top-bracket income tax rates exist certainly has not stopped people from seeking higher wages. A more considered critique of the inheritance tax is the fact that there are difficulties in preventing tax evasion and the costs of administering the tax may dilute its benefits. However, this is more a matter of fact and degree: carefully drafted legislation and anti-avoidance provisions can go a long way to ensuring the success of the scheme.

The inheritance tax is congruent with core Australian beliefs in meritocracy; that personal hard work, talent and commitment should be the main factors determining one’s success. Although unpopular, the tax remains one of the most socially and economically desirable avenues for addressing the divisive inequality issue. Much remains to be determined; the threshold for minimum assets, the tax rate, where the revenue from the tax is to be directed, to name a few. However at this point, any discussion of silver spoons is much welcomed at the table.

 

Main image source: http://depositphotos.com/9098243/stock-photo-baby-boy-with-spoon.html

[1] Inheritance tax – a simplified view of inheritance tax in Australia. (2017). Taxes.net.au. Retrieved 7 February 2017, from http://www.taxes.net.au/inheritance-tax.htm

[2] Estate Tax. (2017). Irs.gov. Retrieved 5 February 2017, from https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

[3] A perfect tax? | Taxation. (2006). Taxation.co.uk. Retrieved 7 February 2017, from https://www.taxation.co.uk/articles/2006/03/02/3878/perfect-tax

[4] Richardson, D. (2016). Surprise me when I’m dead: Revisiting the case for Estate Duties (pp. 1-14). The Australia Institute.

[5] Martin, S. (2017). America’s Un-American Resistance to the Estate Tax. The Atlantic. Retrieved 5 February 2017, from https://www.theatlantic.com/business/archive/2016/02/resistance-estate-tax/470403/

[6] Australia’s Household Income and Wealth Distribution. (2010). Mccrindle.com.au. Retrieved 6 February 2017, from http://mccrindle.com.au/the-mccrindle-blog/australias-household-income-and-wealth-distribution

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

  • Cheryl Bookallil

    With the current budget deficit and the growing inequality taxing large inheritances is an idea who’s time has come. Another idea to improve the budget bottom line is to extract HECS debts from deceased estates. Currently many people who studied under the benefit of tax payer funding will never repay their HECS.

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