Is it time to tax ‘old money’?

Australia has sizeable wealth inequality, with the mean net worth of the wealthiest 20 per cent of households at $2.9 million - 70 times higher than that of the lowest 20 per cent at $36,500, in 2015/16.

There are no inheritance taxes in Australia but a widening gap between the haves and have-nots is sparking chatter about changing the law to try to remedy social inequality.

Many people feel conflicted about the subject but it’s something we need to talk about because intergenerational inherited wealth may lead to injustices if nothing is done to control it, warns Dr Dan Halliday, political philosopher at the University of Melbourne.

Australia once had a death duties tax regime in place but it was abolished in 1979. We pay more than 100 different taxes but there is no specific inheritance tax.

Inherited wealth, along with its influence, is a “shadowy sort of thing”, says Dr Halliday.

Flows of wealth down generations move largely hidden from view, if not from the tax authorities, then at least from most citizens, he says.

“For this reason, the problem of inherited wealth lacks the drama of many other social phenomena that moral and political philosophers try to study, such as war, immigration and punishment,” Dr Halliday says in his new book Inheritance of Wealth.

“Other, not quite so dramatic subjects are at least highly visible and therefore hard to ignore, such as justice in education, healthcare and gendered divisions of labour. The impact of inherited wealth is easier to forget, or even hide or misrepresent.”

Parental help with a house deposit is a small, first-generation inheritance that can help expand the middle class or at least stop it from shrinking. Gifting is popular: even Prime Minister Malcolm Turnbull has encouraged wealthy people to “shell out” to help their kids into the property market.

Taxing old money

The conversation about what place inheritance should have in our society is in large part a question about how much tax should be put on it. A big worry is that years of leaving inheritance unchecked will lead to patterns of ‘dynastic wealth’.

In a society where those who do not inherit struggle to keep up with those who do, there may be a case for taxing second generation wealth – or old money – while leaving inheritance from newly produced wealth more free to pass down.

Why distinguish between the inheritance of old and new fortunes? Dr Halliday argues that class hierarchies become more pronounced over time, and second-generation inheritances may compound and exacerbate the problem, contributing to what he labels economic segregation.

Segregation of this kind occurs when an individual’s life prospects and/or social status depend on his or her group membership – specifically, membership of a group that possess greater wealth than others he explains.

“Inherited wealth undermines social justice when it helps maintain group-based wealth inequalities over time, so that one’s prospects in life are dictated by the family they are born into.”

Inequality can be toxic and literature supports this view: the 2009 book The Spirit Level: Why More Equal Societies Almost Always Do Better by epidemiologists Kate Pickett and Richard Wilkinson uses an evidence-based argument to highlight how health and social problems are significantly worse in rich countries rife with inequality.

Globally, some governments already legislate to ensure those benefitting from intergenerational affluence pay dues to society. Ex-British Prime Minister David Cameron came under public scrutiny for his own inherited wealth, eventually publishing details of his tax returns to be transparent.

The 32nd President of the United States, Franklin D. Roosevelt, himself from a wealthy family, said this: “The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little”.

Dr Halliday says to reach a more just society, we have to be more serious about restricting the right of individuals to hand wealth to younger generations.

It’s time to address social inequality by taxing second-generation inheritance at higher rates than first-generation inheritance, he says.

“Inheritance should be taxed not simply in accordance with how much wealth is actually passed on but also in accordance with the wealth’s age, assuming this can be measured,” he says.

An approach like this represents one way of getting more serious about taxing dynastic wealth, while allowing parents who work hard and save to pass on at least some of the wealth they’ve created.

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