Inheritances are destroying the ‘fair go’. It’s time to tax them

Have you ever noticed that your friends suddenly have a house deposit? Or they pursue their passions, yet always manage to pay the rent? What about those jokes you make about not being able to afford a house until your parents pass away? Are you a parent worried about how to help your adult children financially?

You’re not alone. What’s happening is the largest intergenerational wealth transfer ever – largely from Boomers to Millennials. Combined with the housing and cost-of-living crises, this is leading to some rather awkward, dark humour. More concerningly, it’s starting to tear at our nation’s social fabric.

The bank of mum and dad is one of the nation’s largest lenders.Credit: Getty Images

I lost my mum to cancer in 2021. Mum worked incredibly hard, raising three kids while working full-time, and ended up building a small nest egg for herself. She had planned to spend her retirement sailing around Australia, but passed away at 58 before she could leave port. A portion of her life savings ended up with me.

I would forfeit the money in a heartbeat to have Mum back. But I’d be lying if I said that suddenly having a couple of hundred thousand dollars wasn’t liberating. For my wife and me, it meant a house deposit.

I also left my well-paying job to pursue something I’m passionate about. I was no longer constrained by the need to save a large chunk of my income for the next decade for a house deposit – an increasingly difficult task once I had paid tax and rent, made HECS payments and bought groceries.

I’m not alone in receiving money from a parent. The bank of mum and dad has become one of Australia’s largest lenders. In the 1980s, 15 per cent of first home buyers received parental support. Today, according to the Centre for Equitable Housing, that figure has surged to 40 per cent and beyond.

My economic security shouldn’t be determined by the financial resources of my parents, or in this case, by tragedy.

This is the tip of the iceberg. The Productivity Commission has reported that the value of inherited assets and gifts will probably quadruple over the next 25 years.

The implications are significant. We’ve been told that hard work leads to economic security and a fulfilling life. We can get an education, work or start a business, buy a home and raise a family.

However, with the rate of private wealth accumulation far outstripping real wages over recent decades, this feels like a lie for many younger Australians. If your parents aren’t in a position to assist or are fortunate to live into old age, you are facing a major disadvantage.

My inheritance allowed me to realise my goals much sooner. But as an economist interested in social equity, the injustice alarms were ringing. My economic security shouldn’t be determined by the financial resources of my parents, or in this case, by tragedy.

For a long time, much of the intergenerational debate has centred on how fortunate the Baby Boomers were and how unlucky Millennials are. This holds true regarding the timing of events such as the global financial crisis and the pandemic, the rising costs of education and housing and the climate crisis.

That isn’t where the only divide lies. Another divide is between those with access to family wealth and those without. It’s not purely about intergenerational fairness, it’s also intragenerational.

Political leaders are beginning to acknowledge the problem. The prime minister recently identified intergenerational equity as the biggest issue facing young Australians, noting that many feel they aren’t getting a “fair crack”. Yet neither Labor nor the Coalition has a serious plan to address the tax settings that drive inter- and intra-generational wealth inequality.

Our tax system drives inequality because it favours private wealth accumulation over work. Younger workers often face higher effective tax rates than millionaires, property investors and wealthy retirees on similar incomes due to our world-leading array of tax breaks for wealth holders, including our lack of an inheritance and gifts tax. Australia abandoned such levies in the 1970s, but we should reconsider them.

Baby Boomers will pass on an estimated $224 billion each year in inheritances by 2050. With an OECD average inheritance tax rate of 15 per cent, we could raise up to $34 billion annually.

That’s a lot of money that could fund programs such as free university education, world-leading parental leave schemes or ambitious affordable housing programs that allow all younger Australians to build their lives.

There’s no doubt that taxing wealth, including inheritances, is one of the most controversial, difficult and emotional areas of tax policy. Many simply want the best for their kids and believe that “they’ve worked hard and should be able to pass it on”.

However, many others feel offended that an inheritance or gift is the only viable path to financial security. In our survey work with younger generations, we found strong support for inheritance taxation. More than 73 per cent of younger people we surveyed would back an inheritance tax on estates worth more than $1 million.

Rather than needing to depend on family wealth for economic security, we ought to create a tax system that rewards the hard work and effort of those just starting out. We need to address the under-taxation of private wealth compared to work.

As a community, we can use the funds raised to collectively invest in the things younger generations need to build their lives. This way, we can uphold the Australian ideal of a “fair go” for generations to come.

Thomas Walker is the CEO of Think Forward, an economics think tank run by younger Australians.

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