On the face of it, Australia seems like a much more equal country than it was half a century ago. Governments have actively pursued an agenda to increase equality through expanded access to higher education, a greater equality of access to public goods and the removal of discriminatory barriers. Yet, despite these changes, there continues to be a strong relationship between individual’s socio-economic status and that of their parents.
Labor MP and economist Andrew Leigh has previously noted that intergenerational mobility in Australia has changed little since the 1960s. This is despite greater access to education and the introduction of anti-discrimination legislation under Federal Labor Governments. At the same time, inequality has increased significantly over the past few decades. From 1980 to the late-2000s, the top 1 percent of Australians share of national income rose to 10 percent, nearly reaching 12 per cent share of the top 1 percent in 1910s and 1920s. This increased inequality has the potential become entrenched across generations.
An inheritance tax may be one practical measure to limit the entrenchment of this inequality and help to level the playing field. Australia is one of the few developed countries in the world that does not have any inheritance tax. State governments, following Queensland’s lead in 1977, abolished inheritance taxes at a state level and the Federal Government abolished the inheritance tax in 1979. The re-introduction of an inheritance tax at a federal level would help to ensure that individuals derive income from hard work and initiative rather than from their socio-economic background through inheritance. Any inheritance tax should also include a gift tax to prevent a person from avoiding paying inheritance tax by giving away all his or her assets before death.
While opponents of inheritance taxes have characterised it as deterring entrepreneurship, supporters include some of wealthiest individuals in the world such as George Soros and Warren Buffett. Buffett has emphasised its importance in maintaining a meritocracy and argued that the proposed scaling back of the inheritance tax in the United States would be like “choosing the 2020 Olympic team by picking the eldest sons of the gold-medal winners in the 2000 Olympics”, entrenching privilege and undermining equality of opportunity.
An inheritance tax will also encourage a stronger culture of philanthropy amongst the wealthy in Australia. While wealthy Americans gives 10-15 per cent of their net worth to charities, the average wealthy Australian gives less than three per cent. In the United States, philanthropy has provided significant funding to universities, the arts and various community organisations. Philanthropy has helped to enrich civil society across America, supporting many non-profit organisations, funding nearly a third of their annual budgets. An inheritance tax would provide a strong incentive for greater philanthropy and strengthen civil society in Australia.
There are some strong objections to an inheritance tax but the one that resonates most with many people is the desire of middle income families to set aside some modest assistance to their children. Australia has a relatively high rate of home ownership, at around 70 per cent of households and many may fear that house price rises on the family home, beyond the indexed rates of exemptions, will mean they are unable to leave anything to their children. A solution may be to introduce a progressive model of inheritance taxation, outlined by the philosopher John Rawls, indexed to average increases in household wealth.
Rawls argued that a just society would have an inheritance tax based upon on receiver of the inheritance. Under such an inheritance tax, individuals from a low socio-economic background receiving an inheritance would face little to no taxation while wealthy individuals would have any inheritance received taxed heavily.
The most recent data on inheritance patterns indicated that only ten per cent of inheritances over $100,000 go to individuals in the two lowest wealth quintiles. Almost half go to the richest wealth quintile. By indexing the tax to average increases in household wealth, individuals would avoid taxation due to rising average house prices on the family home, keeping its focus on the wealthy. Middle income families could “set something aside” for their children while preventing wealth transfers which would greatly widen existing inequalities.
In her maiden speech, Julia Gillard stated that:
a Labor vision, must also be a vision of opportunity, a vision whereby each and every Australian, no matter what their personal circumstances, is given an opportunity to develop and to excel.
The introduction of a progressive estate tax would be a practical and progressive way that the current Government could help fulfil that vision by helping to improve intergenerational mobility and equality of opportunity.