Not unexpectedly, my November 2013 Cuffelinks article suggesting that death duties be considered as a public finance tool attracted some strong criticism. I am grateful for all the comments. In retrospect, I concede the label ‘death duties’ would repel many. A more accurate description would be ‘inheritance tax’. I had meant the terms interchangeably.
My responses to the comments are in italics below:
- They complicate asset-rich family business succession through forced sales. Multiple deaths during a short period are even worse.
As pointed out in the comments, insurance is the obvious solution. Accrual accounting will treat the related cost as an ongoing business expense, amortised as net worth is built up. This is no different really from the way family needs would be financed pursuant to the breadwinner’s death: insurance or asset sales. With prudent planning, fire sales can be avoided through holding a proportion of liquid assets.
- It is an appalling tax, as elders will worry about it in their twilight years. Pre-empting it during one’s lifetime by gifts risks leaving the donor without money, or dependent on recipients. A harrowing example of the commentator’s great grandmother was cited.
As I had explained, the dead cannot be taxed, only those left living. Individual examples are always painful. Those who accumulate wealth would be accustomed to taxes on income, and most cope by only considering the post tax component for meeting their commitments (e.g., a worker focusing not on gross but net cash flow). The taxation of capital gains is similar, when an investor would take into consideration the net-of-tax gain.
- Superannuation imposes inheritance tax indirectly, by levying 15% (plus medicare) on benefits paid to non-dependents such as adult children. The tax can be avoided by paying the benefits during the member’s lifetime.
I am unsure if this is an argument for (‘we already have it, so why the fuss?’) or against (‘shock horror, the dreaded tax lurks in unlikely corners’). Regardless, for inheritance tax to be effective and fair, it should be accompanied by suitable anti-avoidance measures. Circumvention through prior gifting would be obvious. Centrelink already claws back certain gifts in calculating age pension.
- The dichotomy inherent in taxing earned income in full, capital gains in part but exempting gambling and inheritance is inequitable.
To encourage a strong work ethic, as a principle, unearned income (inheritance, gambling and capital gains) should be in principle taxed in preference to earned income from personal exertion. The current attitude towards inheritance tax offends the principle. The worsening dependency ratio (workers to total population) demands a review, to transmit appropriate behavioural signals.
To sum up, a strong case against considering the tax has not been made as the economy balances the many competing factors on the demand and supply side. Any introduction has to be tested against real income, capacity to pay, progressiveness and the inevitable challenges of transition. I adored the suggestion that death duties give an extra incentive for living longer. Researchers, take note. The economies of the world struggling with improving longevity have now stumbled upon the ‘killer’ rationale – literally speaking - for introducing an inheritance tax.
Ramani Venkatramani is an actuary and Principal of Ramani Consulting Pty Ltd. Between 1996 and 2011, he was a senior executive at ISC /APRA, supervising pension funds.