The combination of death and taxes generally does not make for popular public policy. Taxing bequests (through estate or inheritance taxes) is widely viewed as an unacceptable intrusion by government into the private business of families. Politicians are loath to be associated with ‘death duties’, fearing electoral backlash.
Australia abolished its estate and inheritance taxes at Commonwealth and state level in the late 1970s and early 1980s and has barely looked back. A brief mention of wealth transfer taxation in the 2010 Henry Review of Australia’s tax system sank without trace. Taxing bequests is firmly off the political agenda in Australia, but how accurate is the received wisdom that this form of taxation is deeply unpopular with voters?
My recent article in the Australian Journal of Political Science, A qualitative exploration of attitudes towards wealth transfer taxation in Australia, describes research raising the possibility that taxing bequests may not be as unpalatable as is often assumed. Social and economic norms have shifted in the four decades since Australia last taxed estates or inheritances, changing the way people think about giving and receiving bequests and potentially reducing public opposition when it comes to taxing larger bequests. This raises the possibility of putting bequest taxation back on the political agenda. The key to a positive public response lies in the way this form of tax is designed and framed.
The inheritance tax debate
The arguments in favour of bequest taxation carry some weight, making its bad reputation particularly frustrating. Inheritance drives increasing wealth inequality and inhibits social mobility. Empirical data indicate that the people most likely to receive substantial inheritances are those who need them least and have already benefited in other ways from having well-off parents. With longer life expectancy, people tend to be in their 50s or older by the time they inherit and are often already financially secure. Parents who wish to give their adult children a material leg-up would be better off helping them get into the property market in their 20s or 30s rather than leaving them an inheritance decades later.
Economists generally find a lot to like about bequest taxes, which are a relatively efficient form of taxation and do not present the work disincentives that some suggest are generated by an income tax. Inheritance and gifts are the only major forms of gain that go untaxed in Australia. Someone who works for their income is taxed while someone who receives an unearned windfall is not. While a number of other countries have also repealed bequest taxes, they remain common across OECD nations (including the United Kingdom, the United States, France, Germany and Japan) or have been replaced with capital gains taxes (as in Canada).
Unfortunately, bequest taxation often works better in theory than in practice. Inheritance and estate taxes have to be carefully designed to minimise the potential for tax evasion by those with the resources to arrange some clever estate planning. Legitimate tax exemptions (such as for charitable bequests – disappointingly few of which are made in Australia) need to be considered. Public opposition to bequest taxation increases when it starts to reach too far into the middle classes, so thresholds need to be indexed to inflation and property price rises. Whether the family home is exempt is another issue to address.
Understanding the attitudes of young and senior Australians
Evidence from the United Kingdom and the United States suggests the perception that bequest taxes are unpopular is well-founded, though opposition does tend to soften when the focus is shifted to the broader social benefits of these taxes, and the fact that they tend to impact only people who are very well-off.
Little is known about Australians’ attitudes towards bequest taxation. Australians have tended to score quite highly on generalised tax aversion, but there are signs this may be changing. Data from the most recent Australian Election Study in 2019 indicate that the proportion of people favouring less taxation has fallen (from two thirds in the 1980s to just over a third), while the proportion favouring more social spending has increased (from 15 per cent in the 1980s to over a third). The COVID-19 pandemic is likely to have made people view social spending even more favourably.
The research I conducted took a qualitative approach to uncover the factors underlying public attitudes towards redistributive policy in a way that survey data cannot. The 54 participants fell into two groups – 18 to 24-year-olds and 60 to 70-year-olds – as the study was exploring how age affected people’s views. In other respects the sample was relatively diverse, including people from urban, regional and rural areas; from different socio-economic strata; and from culturally and linguistically diverse backgrounds. Conducting in-depth interviews meant the sample size was small and the results are not generalisable to the broader population. They do, however, suggest that attitudes towards bequest taxation may not be as hostile as is commonly assumed.
Two thirds of the study participants agreed or strongly agreed that Australia should consider introducing an estate tax for a small number of large estates; less than a fifth of participants were against the idea and the remainder were neutral. Around $3 million to $5 million (including the family home) was the most favoured threshold estate value. Framing the hypothetical tax as one that would only affect a few large estates undoubtedly increased the level of support among participants. The reasoning underpinning their support, however, was the most interesting aspect of the findings.
Few of the older participants said they wanted to leave a bequest. As one participant (male, age 70) observed: ‘I don’t see why in particular my child should get all this money simply because I’ve been wealthy’. Meanwhile, none of the young participants said they expected to receive an inheritance in due course, or that older people had any obligation to leave bequests. This comment from one young participant (female, age 23) was typical: ‘If my parents are wealthy I would really prefer not to get a cent from them and have them spend it all on cruises and whatever because they’ve saved a lot during their lifetime’. Similarly, one young participant (male, age 23) remarked ‘They can spend whatever they like, it’s their money, they’ve earned it, do what you want with it’.
Participants’ lack of interest in giving or receiving bequests meant few saw it as problematic if the tax office took a cut when a bequest happened to be left. There was little sign of the ‘familial solidarity’ paradigm, which implies that family members have obligations to provide for each other. Nor was there evidence of intergenerational conflict over resources. Rather, most of the participants took the view that people were entitled to do whatever they liked with their money, and no duties or obligations attached to wealth, not even in relation to family members. As one participant (female, age 60) reported explaining to her children: ‘we’ll never leave you any debts, but we’re not going to leave you any money…your life is your own, our life was our own’. It is ironic that the rigorous individualism which appears to have undermined any sense of duty towards descendants may also have removed a major obstacle to a tax reform that would deliver collective benefits.
Future research agenda
More research is required to further investigate contemporary views towards taxing bequests. The views of mid-adult age groups who have the greatest financial responsibilities, pay the most tax, and for whom the prospect of inheriting may appear imminent, would be of particular interest.
For now, the results from my research suggest that reintroducing an inheritance or estate tax should not be written off as a policy reform option, particularly for governments facing increasing fiscal pressures due to factors such as population ageing and pandemic-related spending. Just don’t call it a ‘death duty’: ‘legacy levy’ has a much nicer ring to it!