Giving to the next generation

Australians may be generous than others in leaving behind a legacy for their family members, but should those inheritances be taxed?

A recent survey by international financial services company HSBC found that 69 per cent of Australian retirees planned to leave an inheritance for their families.

The average value of inheritance expected to be left behind by retirees in this country, of about $US 502,000, is estimated at more than four times the average of other countries surveyed.

A spokesperson for HSBC credited (http://www.theaustralian.com.au/business/wealth/hsbc-survey-finds-australians-plan-to-leave-biggest-bequests/story-e6frgac6-1226782406764) the great Australian appetite for making bequests to strong annual average growth in household wealth, driven partly by high and rising house prices.

Another cited factor informing Australiaʼs position on top of the international inheritance league table is the lack of inheritance taxes, compared with other developed countries, such as the United Kingdom and United States, with large inheritance taxes and smaller average bequests.

Australia owes much to this legacy, in that we have enjoyed lower tax burdens as a result, but arguments favouring inheritance taxes, both here and abroad, linger.

The Australian Greens have favoured inheritance taxation in the past, while now Labor MP Andrew Leigh wrote in 2006 (http://cpd.org.au/2006/03/bring-back-the-inheritance-tax/) that ʻreinstating an inheritance tax on the super‑rich would be consistent with the Australian values of egalitarianism and the fair go.

A bequest tax was also recommended in the 2008 Henry Tax Review final report, on the basis that more revenue could be extracted from wealthy households.

One of the more unlikely sources favouring inheritance taxation was former Nobel Prize economist, and highly‑regarded defender of markets, James Buchanan, who went so far as to advocate a 100 per cent tax on bequeathed estates.

As far as the economic arguments go, the case against re‑introducing inheritance taxation in Australia seems reasonably straightforward.

Taxes on inheritances would tend to discourage donors from bequeathing their estates to beneficiaries, which in turn increases consumption, and reduces private savings, by those who wish to pass on their assets upon death.

With savings representing the effective feedstock of investment activity by the private sector, the imposition of an inheritance tax would, in turn, deter capital accumulation.