Tax changes needed to meet inequality

The need for major tax changes in the face of growing inequality has been obvious for some time, but this week’s Productivity Commission report on wealth transfers adds to the case.

The commission reported that more than $120 billion was transferred in inheritances and gifts in 2018. Of that 90 per cent was in inheritances. It has doubled since 2002 and it keeps growing, adding to inequality.

There is a good case for taxing inheritances. You could argue that people who have built up wealth should be entitled to give their money to whomever they want. Against that, however, is the argument that the recipients are often richly undeserving. 

Moreover, it is difficult to build up wealth without relying on the provision of public infrastructure, from police protecting property to schools educating workforces and so on. So why shouldn’t some come back?

Further, dying Australians are a stingy lot. Only 2 per cent of total inheritances went to charities.

Already-wealthy people in their 60s and 70s made up a large portion of those inheriting – in short, people who do not really need the money.

The main drivers of this increasing inequality, of course, are housing and to a lesser extent superannuation. Again, housing and superannuation get generous tax treatment. 

Overall, the tax system should be redesigned so it does more to reduce inequality and the resentment and social dislocation it creates.

However, the 2019 election result has probably put paid to any dramatic tax changes federally. A scare campaign on death duties that were not part of Labor’s platform nonetheless worked because the platform did include changes to capital-gains tax, negative gearing and franked dividends.

In 2022 tax increases of any sort will be off the agenda federally. But a courageous state government might be able to do something. 

To date a couple of jurisdictions have set up long-term schemes to get rid of stamp duty and replace it with property taxes. But it seems that they have merely increased property duties markedly while doing nothing much about cutting stamp duty.

Moreover, by-and-large the principal residence goes under the tax radar for both property taxes and capital-gains tax. Again, this enables the already-wealthy to pile up their inheritable wealth. 

It also contributes to intergenerational unfairness already made brutal by a housing market that shuts younger people out.

A courageous State Government could make some major changes that would make things fairer for younger people. And other states and territories would follow, just as they did in the mad rush to end state death duties in the first place in the 1970s.

State Governments could remove stamp duty and replace the revenue by broadening land taxes to all properties. Aside from owners of principal residences, many investors in nearly all states and territories even escape land taxes because their holdings do not reach those states’ fairly high thresholds. In NSW, for example, it is more than $800,000 of unimproved value, before the land becomes taxable.

A change like this could have a profound effect on the housing market. Stamp duty shuts young people out and it also deters empty nesters from downsizing. With the deterrent removed people would be more likely to move to more efficient housing. So, there would be more housing stock. 

A land tax on the principal residence would also add to the incentive to downsize. And the downsizing would enable older people to spend some of their capital rather than bequeathing it.

Federally, election scare campaigns aside, negative gearing and franking credits could be dealt with in the same cunning and quiet way that deductions for medical expenditure were done away with. In 2014, deductions for medical expenses were restricted to a maximum of whatever you claimed the previous year, no matter how much higher they were in the present year. By 2019 they were abolished completely.

It happened with hardly a whimper. If a reasonable and just tax deduction can be subtly got rid of, why can’t it happen in the same way to two of the three tax provisions that are throwing petrol on the housing market and causing so much inequality?

The Productivity Commission’s report is a clear warning to governments to do something about growing inequality which has been shown to be a cause of poorer economic performance.

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Ian Mathews, my boss, colleague, mentor, friend and editor of The Canberra Times before me has died after a short illness. His funeral will be on Tuesday. Jack Waterford has already written an excellent obituary.

However, I would like to relate another aspect of his editorship that is so pertinent today: his commitment to job security – his loyalty to staff. It manifested itself in three ways.

When the printing industry faced the job losses and turmoil of computerisation, Ian was instrumental in retraining Canberra Times printers as journalists setting an example for the advertising department to follow suit. (And, by the way, the coal industry could learn from that.)

Secondly, he believed in people learning from their mistakes and giving them more chances. In the 14 years he was editor and editor-in-chief, to my knowledge he fired only one person, and that for really egregious journalistic error.

Thirdly, once someone joined The Canberra Times, they were looked after. The strict award conditions on sick pay were not applied. As far as Ian was concerned, you were paid until you returned to work, however long it took.

After an ownership change and a new management regime, I was in his office once and could not help but overhear a conversation which ended with something like: “She is to remain on full pay, and if you don’t like it, take it out of my salary”.

He won that argument, but told me not to repeat it. He was that sort of unassuming man.

I am now released from that confidence. Vale Ian Mathews.

Crispin Hull is a former editor of The Canberra Times and regular columnist.