Mum jokes I won’t be left an inheritance. I might not mind

I used to get disgruntled any time Mum cheekily insisted my brother and I shouldn’t bank on getting an inheritance. Firstly, I don’t want to think about anyone’s death. Secondly, who doesn’t want to give their kids a leg-up– especially when their firstborn writes about the woes of Australian housing affordability every other day?

Not everyone gets stuck with an opinionated daughter with a vengeance against surging rent and house prices. But as it turns out, some of the richest people in the world are planning to divert most of their wealth from their children: Facebook co-founder Mark Zuckerberg and investment legend Warren Buffett have both pledged 99 per cent of their fortunes to charities, and film legend Jackie Chan has insisted his children will not get any of his millions after he dies.

With Baby Boomers, including my parents, getting older, we have a large wave of inheritance on the horizon.Credit: Simon Letch

Now, in both Buffett and Zuckerberg’s cases, their pledges will still leave their kids with more than $1 billion to share. But there’s clearly some recognition that the tradition of handing all our wealth down the family tree is not necessarily good for society. Buffett, for example, recognises that “equality of opportunity has been on the decline” and that we need a progressive and meaningful estate tax to curb the movement of a democracy towards plutocracy.

It’s in our nature, generally, to want to look after our kids. And when we see other parents stacking the odds in their children’s favour by leaving them with inheritances, it’s difficult not to follow suit.

This is especially true thanks to Australia’s unbelievably expensive housing market. Two-thirds of prospective Australian home buyers last year believed the only way to afford a property would be to receive an inheritance from their parents. That makes sense when median-priced houses are nearly 10 times household income in many capital cities and more than two-thirds of renters in Australia are under housing stress, severely limiting their ability to save for a deposit.

Inheritance tax or estate tax, morbidly called “death duties” by some, is controversial. A death duty is a tax on wealth that has been built up to the time of death. It can be applied directly to a person’s estate when they die (as an estate tax) or to the person who inherits the money at whatever their marginal tax rate is (as an inheritance tax). Australia has had neither of these for several decades after becoming the first rich country in the world to abolish estate tax in 1978, with all states abolishing death duty by 1983.

So, why should we change our tax system?

Well, first, Australia’s wealth gap has been rising, and income inequality – as measured by the Gini coefficient (where zero represents perfect equality between households and 1 represents one household getting all the income) – has risen seven percentage points over the past 40 years to 0.46. That’s about as high as it was in the 1950s.

Excessive inequality can increase criminal behaviour, and even stunt our overall economic growth. Why? Because it can undermine educational opportunities for children from poor socio-economic backgrounds, decrease social mobility and hamper skills development, productivity and wages.

Second, our tax system needs a shake-up.

Millie Muroi with her mother.

Taxes play an important role in ensuring we can provide services including healthcare and education across the country. But if we want a tax system that minimises the drag on our economy, there needs to be change – including a move towards tax on inheritance.

The Australian tax system is quite heavily reliant on taxing personal income and company earnings, with taxes on these two sources of income contributing about 62 per cent of government revenue. But because we tax wealth and assets so lightly, Australia winds up being among the lowest-taxing countries in the OECD.

So it’s worth asking: would you rather keep paying high taxes on your income, or more tax when you die? People should be able to keep a decent amount of what they’ve earned. But we need to remember that being born into a wealthy family is all luck: an inheritance is not earned by the next generation.

We shouldn’t necessarily increase taxes just because we can. However, we can shift the proportion of tax revenue we collect from income, which disproportionately impacts disadvantaged groups and young people, towards assets when people die. Yes, that means some young people – including me – might miss out on inheriting wealth further down the line, but it could reduce the current burden of income tax, for example.

With Baby Boomers, including my parents, getting older, we have a large wave of inheritance on the horizon. We’re expecting Australians over the age of 60 to transfer roughly $3.5 trillion in wealth over the next 20 years.

An inheritance tax would have no impact on one of the biggest reasons people want to earn more: to improve their standard of living.Credit: Dionne Gain

And we should be careful not to introduce a broad, flat tax on inheritance. That’s because inheritance often provides a bigger boost, at least as a proportion of existing wealth, for lower and middle-income children. The boost to wealth from receiving an inheritance is roughly 50 times larger for the poorest 20 per cent compared to the wealthiest 20 per cent. If we introduce an inheritance tax, it should be on inheritances above a certain threshold.

A tax on inheritance is also a relatively efficient way of raising government revenue with fewer distortions than many other taxes.

Receiving an inheritance has been shown to reduce recipients’ labour supply. That is, people tend to have less of a desire to work if they’ve been given an inheritance, especially when it’s a large sum. Introducing a tax on large inheritances, by contrast, would probably incentivise people to work more.

But couldn’t an inheritance tax also disincentivise the giver of an inheritance from working so hard? It could affect the motivation of those strongly driven by the desire to leave wealth for their kids, but this isn’t likely to be significant. And an inheritance tax would not affect one of the biggest reasons people want to earn more: to improve their standard of living.

A tax on inheritance also needs to be accompanied by a gift tax to stop people from using the loophole of just transferring all their assets to their kids before they die, although we should exempt any charitable donations.

While my mum might joke about leaving no inheritance for me, the truth is she’s too selfless to spend everything on herself: if it didn’t end up with me or my brother, there would still be money left for charity. But the more I think about death and inequality, the more I wonder if I’m really entitled to wealth I had no part in creating. Younger me would be kicking my shins under the table, but if it meant we had an effective inheritance tax system in place, I think I could live with less inheritance.

Ross Gittins is on leave.

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