Gadfly: On Inheritance Tax and the Politics of Entitlement

0 Posted by - 02/10/2013 - Blogs

In December 2012, after years of criticism from the right-wing press, the Greens abandoned their support for an inheritance tax. Given their position on the rather limited Australian political spectrum – essentially, the most left-wing party with any real influence – one could be forgiven for inferring that this former policy was more than a little radical. This couldn’t be further from the truth.

In Australia, inheritance tax was an established part of the framework until the late ‘70s. Then, mostly as a result

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of mass rorting by upper income earners and the prospect of retirees fleeing the southern states for the latest tax haven, Prime Minister Malcolm Fraser decided to follow the lead of the ultra-right-wing Queensland State Government in abolishing the levy. Since then, the concept has been political anathema.

Elsewhere, the story is quite different. In the United Kingdom, currently under a Conservative Government, all estates worth over £325,000 are taxed. In continental Europe, policies such as these are the norm rather than the exception. Even in the more libertarian United States, there is an upper limit on bequests that can be passed down without levy. Although a few criticise these policies on pragmatic grounds, even conservatives tend to concede that it is good economic policy.

The logic behind the concept’s overseas longevity can be seen in the basic structure of societies like ours. It goes like this: in a functional social democracy, most able-bodied adults are employed. All citizens are granted a minimum quality of life through a strong welfare network and national minimum wage, but sufficient financial incentives exist in order to encourage the unemployed to re-enter the workforce and those engaged in menial jobs to achieve promotion. Whilst permitting wage inequality, such a system places a high value on equality of opportunity – that is, the concept that all citizens should be given the chance to be as productive as possible.

In the meantime, working citizens contribute to the overall maintenance of society by having some of their earnings taken by the state as taxation. In most countries, it is accepted as the norm that these amounts should differ depending on income; that those who have more to spare should contribute more (but not so much that incentives are damaged). In theory, at least, this makes for an efficient, fair economy. In reality, however, obscene inequalities persist; not least through the phenomenon of inheritance.

There is no need to be indirect about this: inherited wealth is, by definition, wholly unearned. If we put to one side the individual’s contract with the state – the individual works and pays taxes; the state provides infrastructure and a safety net – we are left with varying quantities of surplus cash, distributed arbitrarily according to family name. This money might be the difference between one’s child being able to attend a private school as opposed to a public school; between being able to afford a university education and remaining an unskilled labourer; between having the resources to start a business and never getting the opportunity to do so. In some cases, being a beneficiary of unearned wealth can mean never having to do any

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In a country as wealthy as ours, the principle of equality of opportunity should mean that all citizens have access to a decent education, decent prospects of employment and a decent standard of living. When one considers the important role tax revenue plays in maintaining that principle, the unregulated flow of old money starts to look like sheer waste.

One might wonder why, given the fact that we accept tax on earned wealth as a fact of life, tax on this kind of unearned wealth is considered in any way controversial. Most likely, a good part of it is simply due to popular antipathy towards new taxes – John Hewson’s calamitous GST proposal being one of the more obvious examples – though another part may well lie in the way we treat taxes in general.

If one sees taxation as merely part of the social contract, the maximum expectation ought to be that it does not interfere with the pursuit of a reasonable quality of life. That is a relative concept, of course, but it is hard to see how anyone could seriously think that the acquisition of McMansions, multiple sports cars or expensive designer handbags qualifies. Such stockpiling is, once more, pure waste; money that would, objectively and unarguably, be far better spent on government services.

Not everyone, of course, sees taxation this way. For some, it is a burden that frustrates the freedom to regulate one’s own financial affairs unhindered. The ability to spend one’s money how one likes is, of course, important, but that is no reason for the state not to restrain it. Unfortunately, as our progressive parties seem to have discovered, greed is a powerful political force. Thus, we get the popular narrative of levies on bequests constituting a ‘double tax’. Although the purveyors of this rhetoric seem to forget that it is hardly unusual for income to be taxed each time it changes hands – consider the process of employees being paid from company revenue, for instance – it remains a popular view.

Besides the strong culture of entitlement, the concept of family security plays a significant role in opposition to inheritance tax. In some respects, it is a throwback to older societies without welfare safety nets, in which hoarding money was still somewhat necessary in order to ensure the wellbeing of descendants. This concept persists, but has long ago outlived its usefulness. In a society such as ours, we do far better by our children by fostering a healthy work ethic and giving them access to a quality education. The fact is that nobody – apart from actual dependents, who are already accommodated by our societal framework – should need to depend upon the fruits of other people’s labours in order to get by. This should not be taken for granted; indeed, we should strive for even greater social wellbeing and equality of opportunity. Those are goals that require a fair, rigorous taxation system.

If the Australian political status quo is anything to go on, these are unpopular sentiments. For the time being, billionaires will continue to pass on absurd amounts of untaxed money while children from lower-income families receive a substandard, under-funded education. For some, such inequality of opportunity is not at all problematic; simply, an acceptable consequence of wealth concentration. “God helps those who help themselves,” the saying goes. Perhaps God could charge a small fee for his services.

David Heslin

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