The Economics of Death Part 2- Death Duties
Against a backdrop of rising income and wealth inequality across the world support for the increased use of death duties or their re-introduction is growing, witness recent proposals by. UK Chancellor Rachel Reeves (Could Labour impose a “double death tax” of more than 50%?| Money Week.)
In the past I have strongly supported a re-introduction of inheritance tax, a nicer name for death duties (House prices and demographics make death duties an idea whose time has come) as perhaps the only way the trend of gross and growing wealth inequality in Australia can be slowed, if not reversed. The inevitable result of these trends is increased social dislocation of which the current :”cost of living crisis in Australia” is just a foretaste of what is to come
What are death duties?
Death duties (more formally known as inheritance taxes) are levied on the estates of dead people above a predefined tax-free threshold, prior to their distribution to the beneficiaries.
They have a long pedigree, being currently administered in at least 19 developed countries. The average rate among members of the Organisation of Economic Co-operation and Development is 15% but rates vary from 4% in Italy to 55% in Japan. It is now proposed to impose a top rate of 50% in the UK to considerable alarm (Letter: Reeves’ death tax will kill off family businesses)
Australia had the tax until the late 1970’s, administered by both the Commonwealth and State governments. However in both cases the taxes were distinguished by the ease with which they could be avoided (House prices and demographics make death duties an idea whose time has come) and their abolition became a form of virtue signalling by States vying with each other to attract wealthy in-migrants.
Arguments For Death Duties
Revenue Generation: One of the primary arguments in favour of death duties is that they generate significant revenue for the government. This revenue can be used to fund public services such as healthcare, education, and infrastructure, which benefit society as a whole.
Wealth Redistribution: Death duties can help reduce wealth inequality by redistributing wealth from the richest individuals to the broader population. This can create a more equitable society and provide opportunities for those who might not otherwise have them.
Initiate charitable giving: Knowing that a portion of their estate will be taxed, some individuals may choose to donate more of their wealth to charitable causes. This can lead to increased funding for non-profit organizations and social initiatives.
Impede dynastic wealth: Inheritance tax can prevent the concentration of wealth within a few families over generations, promoting social mobility and ensuring that wealth is earned rather than inherited.
Arguments Against Death Duties
Double Taxation: Critics argue that death duties amount to double taxation, as the deceased person’s wealth has already been taxed during their lifetime through income tax, capital gains tax, and other forms of taxation.
Economic Impact: High inheritance taxes can discourage savings and investment, as individuals may feel that their efforts to accumulate wealth will be undermined by the tax. This can have a negative impact on economic growth and productivity.
Administrative burden: The process of valuing an estate and calculating the tax can be complex and time-consuming, leading to administrative burdens for both the government and the heirs. This can also result in legal disputes and additional costs.
Emotional Stress: The imposition of death duties can add to the emotional stress experienced by the deceased person’s family. At a time of mourning, dealing with financial and legal complexities can be particularly challenging.
Yet without them, our rich will get richer
Since death duties went, Australian income inequality has climbed, with the standard measure (known as the Gini coefficient) climbing from 0.27 to 0.33 between 1982 and 2021 on a scale where a result of zero would mean income was equally shared and a result of 1 would mean one person earned all the income.
It’s harder to tell what’s happening to the distribution of wealth. The figures don’t go back as far, and the global financial crisis disrupted what appears to have been a long-term trend for the distribution to become less equal. The Gini coefficient for the distribution of wealth in Australia is approximately 0.52, much worse than in is for the distribution of income.
However, the removal of death duties is far from the only potential reason.
Others include:
- Demographics. More Australians are older, and they are more likely than younger people to own homes whose values have shot up in two waves around the turn of this century and the middle of the 2010s. Almost 90% of the gain in wealth in the past 20 years has been in households headed by someone over 45 years.
- Income growth. Wage growth has slumped during the past decade, leaving higher housing, share market and other asset prices as the chief form of wealth growth.
Untaxed inheritance is likely to matter more in the future. Over the next 15 years about 14% of Australia’s current population is expected to reach its life expectancy, meaning 3.19 million people are likely to die. Their net worth accounts for between 29% to 38% of Australia’s total wealth.
A Fair tax
Death duties meet most of the basic conditions for a good tax.
They are fair (in that they treat people in the same situation the same and take more from those who have than those who do not) and they are easy to understand.
Their big advantage over ordinary income tax is that they distort economic activity less: because they are levied on unearned rather than earned income, they are unlikely to prompt people into earning less.
The Economist magazine puts it this way:
Unlike income taxes, they do not destroy the incentive to work; whereas research suggests that a single person who inherits an amount above $150,000 is four times more likely to leave the labour force than one who inherits less than $25,000. Unlike capital-gains taxes, heavier estate taxes do not seem to dissuade saving or investment. Unlike sales taxes, they are progressive. To the extent that a higher inheritance tax can fund cuts to all other taxes, the system can be more efficient.
Yet death duties remain unpopular
With the exception of having a nuclear power station situated next door, inheritance taxes are possibly the most unpopular idea in Australia, and this is fear mainly derives from unfounded fears.
In taking part in and ABC phone in on this topic in 2019. I spoke to a number of callers with only modest incomes , particularly widows, who were convinced death duties would force them to sell their house. These were real, but irrational, fears in reality, with reasonable asset limits (inflation indexed), the tax would impact no more than 10 percent of taxpayers and would provide a net benefit to the other 90%.
How can Australia re-introduce an inheritance tax
The best chance of bringing an inheritance tax back would be to link to something socially worthwhile such as housing affordability, education, or relief from other taxes. Ordinary bequests beneath a high threshold would be exempted, and the threshold would be indexed. Exemptions could be considered for husbands and wives and perhaps for family farms. In the absence of death duties or some other forms of wealth tax, inequality in Australia will grow with resultant increased social dislocation.
