The Tax That Dare Not Speak Its Name

The Australian federal election campaign is three-quarters of the way through. Only nine more sleeps until we know who will govern the country for the next three years. To date the campaign has gone pretty much to script. Both major parties have played to their strengths, while attempting to downplay their weaknesses.

The minority conservative government continues to trade on the fact of two decades plus of economic growth, modestly claiming credit for the creation of one and a quarter million ‘new’ jobs in recent times. Less – in fact, no – emphasis has been given to the nature of the jobs created or the stagnation of wages, generally. The Labor opposition – holding more seats than the government, thanks to resignations, defections  and electoral boundary changes – focuses on wage stagnation as the key to its ‘fair go for all’ pitch to the electorate, while downplaying its decision to avoid directly tackling the most obvious locus of unfairness – to whit, the shameful poverty of the unemployed attempting to live on the starvation rations of the optimistically titled ‘Newstart allowance.’ One doesn’t have to subscribe to John Rawls’s difference principle to feel that leaving the worst-off totally out of the picture is an odd way to claim the fairness high ground. (Yes, I know that Labor promises to ‘review’ Newstart down the track, hardly encouraging if you are starving now.)

Inevitably, both sides are locked in furious argument as to whose taxation reform policies are the best. The coalition has sweetened its most recent attempt to deliver reduced taxes to the well off by first, back-ending them to five years down the track and secondly, offering relatively small immediate tax reductions to low and middle-income earners. Labor has matched the latter but banked the former to fund a suite of new spending commitments in health, education and disability support.

But what is missing in the great tax stoush is a broader consideration of genuine reforms that would, over time, really reduce the economic and social inequalities that are built into Australian capitalism. I speak here – in hushed tones – of a genuine tax on accumulated wealth. Sshhh, I hear you reply. Won’t that scare the horses, stir up claims of socialism and class warfare? On that last point, let’s face it, if Labor’s policy of intervening to increase the wages of child care workers calls forth images of a communist dystopia, won’t the very suggestion of a wealth tax bring the temple crashing down? And yet, it’s clear that without such policies, the long term drift to ever-greater inequality, apparent since the 1970s, will continue. The corollary of stagnant wages for the many is the increasing wealth of the few.

The arguments against such taxes tend to focus on the here and now, on the supposed unfairness of taking something today from the well off and giving it to others. Acceptance or rejection on these grounds depends on competing views of relative merit and desert. A conservative might claim that the well off deserve their wealth because (and as long as) it was honestly acquired by their talents and hard work. A socialist may demure, pointing to the barriers that a lack of resources creates for poorer people to develop and express their talents, with the added critique that much wealth is not honestly acquired. Unsurprisingly, throughout history, the wealthy have gravitated to the conservative view and the poor to the alternative pole. This dynamic, after all, helped form the basis of the emergence of two-party representative democracy in the West. It still stalks our halls of democracy today, though overlayed by the rise of the middle classes and the fragmentation evident in all classes.

But discussions of the intra-generational distribution of wealth misses the main point. It is the cumulative effect of inequality through the generations that really expresses the unfairness of current arrangements. To the extent that the institution of the family, particularly the nuclear family in contemporary Australia, is the typical conduit for the accumulation and transmission of wealth and its manifold advantages through time, inter-generational inequalities assume centre stage. Wealth accumulated in one generation can be inherited by the next and used to accumulate further wealth, and the augmented stash then passed onto to the third generation and so on. In this way, any direct link between merit and hard work in the first generation is lost. In what sense can the grandchild be said to ‘deserve’ the wealth and its advantages ‘earnt' by his or her grandparents? It’s not just raw fungible wealth that advantages later generations. In each generation, the children of the wealthy enjoy a host of advantages denied their less well off contemporaries, well before they actually inherit any money or property. Good nutrition, access to health, housing and superior schools, travel, successful role models, private tutoring, assistance from well-placed family connections – are systematically related to parental wealth*. Of course, when children grow up parents can then also pass on wealth through gifts or soft loans. The increasing prevalence of (some) parents assisting their children to buy their first home is a case in point. Why should children fortunate enough to be born to wealthy parents enjoy multiple pecuniary and non-pecuniary benefits denied to the children of the less well off? It’s not as if children choose their parents.

The standard defence of not taxing wealth is that such measures would inhibit enterprise, innovation and risk taking, thereby making everyone worse off. This argument, convenient for the wealthy, is when generalised, nonsense. It might apply if wealth was taxed at prohibitive rates, without thresholds or exemptions. But modest taxes levied in targeted ways, with the proceeds used to provide a range of public and merit goods like decent schools and hospitals, will still leave plenty of incentives for those inclined to pursue pecuniary life goals. However, their pursuit is likely to be more dependent on their own skills and efforts than on the multiple formal and informal advantages conferred on them by their parents and grandparents. This is one reason why taxation on the estates of wealthy people after they die is an effective way of limiting the inter-generational build-up of unfair inequalities of both opportunity and outcome. It is the reason why virtually all OECD countries have some form of inheritance tax, including, until the mid-1980s, the Australian states. The question of taxing wealth has recently been put back on the table globally with the publication of Thomas Picketty's book, Capital in the Twenty-first Century, and the various responses to it.

To recent generations all this will be surprising. Older Australians will have also probably forgotten the once-prevalence of death duties, in the same way that most post-war home owners are unaware that once upon a time the imputed rental value of owner-occupied houses was taxed. In the former case it was the decision by the Bjelke-Petersen government to unilaterally scrap 'death duties', in the hope of attracting people to Queensland, that stampeded the other states to follow suit. (As an aside, I once thought it would have been a wise move for a state to retain death duties to encourage its older citizens to migrate north, thus imposing the escalating health costs of its ageing population on the Queensland exchequer. Of course, I was much younger when I thought this.)

It won't have escaped your notice that the mere mention of 'death taxes' in the current election campaign risks unleashing a torrent of abuse and world championship backing away. None of the political parties will have a bar of this tax, never to be mentioned in polite company. The worst barb that the Coalition can hurl at the Greens is to accuse it of secretly plotting to introduce such a tax. The Greens have, predictably, denied any such intention. The tragedy is that properly devised, with a moderately high tax-free threshold and exemptions related to personal property, coupled with an associated gift tax and other anti-avoidance measures, such a tax could immeasurably improve overall fairness without impeding growth and employment. Moreover, there are a range of approaches that could be developed and compared, if only the very mention of the subject was not taboo.

in a recently published book - The Inheritance of Wealth: Justice, Equality and the Right to Bequeath - Melbourne university political philosopher Daniel Halliday has resurrected a scheme put forward by an Italian liberal engineer-economist Eugenio Rignano** in the early twentieth century. Rignano's scheme proposes a staged progressive taxation of inherited wealth. First generation inheritance - parent to children - would be lightly taxed; second generation taxation of the original bequest would be heavily taxed; third generation inheritance of the original bequest would be effectively confiscated. For example, the total sum of wealth inherited would be segmented. The proportion accumulated during the deceased's lifetime would attract a low taxation rate; the proportion inherited by that person from the preceding generation would be taxed at a higher but not prohibitive rate; and the proportions inherited by the recently deceased from still earlier generations would be taxed at or near one hundred percent. The relative tax rates could be varied but the basic principle is that this would be a progressive tax regime, but the progressivity would relate to the different points in time that inheritance quanta took place, not to the total value of the estate at the death of the current wealth holder.

The aim of such a scheme - in addition to the fairness test - is to prevent inheritance from getting out of control, perpetuating monied aristocracies over centuries, with all the threats to democracy that the super-wealth of people like the Coch Brothers. and the Murdoch dynasty (and Clive Palmer). pose. Unfortunately, Australia's political climate is hardly up to a mature debate over this or any other approach that might threaten the current comfortable dominance of the wealthy and their hangers-on. And so, we confine our attention to 'safer' issues like ending negative gearing and 'closing tax loopholes.'

* an historical study of social immobility in the West by Gregory Clark is aptly titled - The Son Also Rises.

* *The other great engineer-economists of Rignano's era were fellow Italian Vilfredo Pareto and Frenchman Leon Walras.