wealth tax

Why Labour may propose an inheritance tax

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OPINION There are a couple of pieces of evidence to suggest may Labour may want to go to the next election proposing an inheritance tax.

The first is the Government’s decision to allocate $5 million over two years to Inland Revenue in the Budget to assess the income and wealth of high-wealth individuals.

An IR spokeswoman confirms that work should shed light on issues including the amount of inherited wealth.

If the Government is going to consider an inheritance tax, commissioning such research was probably going to be a necessary first step.

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* A century of capital gains tax avoidance
* Forget a capital gains tax – what New Zealand needs is a tax on inherited wealth

The Government was flying blind in 2017 when it instructed Sir Michael Cullen’s Tax Working Group not to look at the merits of recommending an inheritance tax.

It had to make that decision without any knowledge of how large inheritances might be influencing the distribution of wealth, because in New Zealand that information simply doesn’t exist.

If anyone had asked the Tax Working Group how much any type of inheritance tax would raise, it wouldn’t have been able to give any kind of answer.

FINANCE AND EXPENDITURE COMMITTEE

Revenue Minister David Parker faces taxing questions at select committee.

But that should change as a result of IR’s research.

The second development came when Revenue Minister David Parker explained the Budget allocation to Parliament’s Finance and Expenditure select committee in June.

Responding to questions from National Party MP Nicola Willis, Parker said he was “not planning a wealth, inheritance or death tax”.

But he went straight on to give a big shout-out to Capital in the Twenty-First Century, a 696-page tome published in 2014 by French economist Thomas Piketty.

Piketty is one of the best-known advocates of inheritance taxes and advised Australia to adopt one when he travelled there in 2016.

The Harvard Business Review noted Piketty’s concern in his 2014 book was that modern economies had resumed concentrating wealth in the hands of the few.

Piketty saw a risk that societies would regress back to the days of Jane Austen in the 19th century, when inheriting or marrying into money were the best hopes of a comfortable life.

Parker has flatly denied the IR research was commissioned with the goal of informing a discussion about an inheritance tax.

John Bisset/Stuff

Parker has flatly denied the IR research was commissioned with the goal of informing a discussion about an inheritance tax.

That’s not as far-fetched as it might seem.

Researchers at the London School of Economics concluded a year earlier that inherited wealth had been on the rise in Britain and France since the mid-1970s, such that it accounted for about 8 per cent and 11 per cent of people’s income, respectively.

That was after previously plummeting from accounting for about a quarter of people’s income in the late 1800s to about 5 per cent in the post-war years.

Piketty’s research has been cited approvingly by the Organisation for Economic Cooperation and Development.

OECD tax director Pascal Saint-Amans said in May that there was a good case for countries making greater use of inheritance taxes, arguing there were “strong fairness arguments” in their favour.

So did Parker order IR’s wealth and income study in the expectation that it might help inform a discussion on an inheritance tax?

Parker says “no’.

National’s Willis is unconvinced.

“I just don’t accept the idea that you would be doing that research with no view to changing policy,” she says.

“My suspicion is the minister is trying to create an evidence base for new taxes that Labour may to campaign on.”

National MP Nicola Willis doesn’t believe the Government would have initiated the research without a policy goal in mind.

ROSA WOODS/Stuff

National MP Nicola Willis doesn’t believe the Government would have initiated the research without a policy goal in mind.

There are at least three big obstacles to an inheritance tax.

The largest one is that although they are applied in 24 out of 37 OECD countries, they probably do sound a bit radical and ghoulish to a lot of Kiwis.

Saint-Amans says inheritance taxes tend to be “misunderstood”, and exceptions would probably need to be carved out for the likes of passing on family-owned farms.

But new research by the University of South Australia suggests the mood is shifting, in Australia at least.

Historically, inheritance taxes had been considered “political suicide”, but the university’s research suggested otherwise, the lead researcher for the study Veronica Coram says.

“We talked to young adults and senior Australians and two-thirds of them thought Australia should consider reintroducing taxes on estates worth more than A$3m (NZ$3.2m), while only one in 10 were definitely opposed.”

A related obstacle is Labour’s tendency to run away from serious debates on tax, demonstrated during its ‘no show’ on the Tax Working Group’s recommendation for a comprehensive capital gains tax.

That culminated in Jacinda Ardern ruling out such a tax, though not an inheritance tax, while she remained Prime Minister, a retreat from its position even before it set up the working group.

Then there is the unpleasant reality that if the debate about a capital gains tax is anything to go by, any discussion about an inheritance tax will be ugly and may get bogged down by disinformation.

Expect tired accusations about the “policy of envy”, dubious claims that talent will leave the country in droves and refrains that, despite many other countries having the tax, it is somehow unworkable.

OECD tax policy director Pascal Saint-Amans says there are strong “fairness arguments” for inheritance taxes and they are more efficient and easier to collect than other taxes on the wealthy.

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OECD tax policy director Pascal Saint-Amans says there are strong “fairness arguments” for inheritance taxes and they are more efficient and easier to collect than other taxes on the wealthy.

But Labour is between a rock and a hard place here.

If IR does its job, its research is likely to highlight that without post-election tax reform, Labour could be on track to be in the unenviable position of spending three terms in government presiding over a period of increased wealth inequality.

That’s not usually what people vote Labour to experience.

Another reason to think the Government may bite the bullet, is that it would seem a sensible thing to do.

Few people would argue that passing on something to your kids isn’t a noble goal and a positive motivation for people.

But it’s a question of balance, and whether it is fair to shift some more of the burden of taxation from wage income on to other things.

No-one to my knowledge is suggesting disallowing inheritances, just changing them from being tax-free.

The OECD’s May report concluded that as well as being fair, inheritance taxes were usually more efficient, and easier to assess and collect, than other taxes on the wealthy.

That is even though they usually need to go hand-in-hand with controls on gifted wealth to be effective.

The disincentive they create for wealth creation are also less immediate than for any other type of tax.

In New Zealand, an inheritance tax that had a tax-free threshold like Britain’s of up to £1 million (NZ$1.98m) for a married couple, would also be likely to mainly tax income that hadn’t previously been taxed.

That is because the chances are that the bulk of any wealth people have built up over and above that during their lifetime will have been derived from capital gains.

The OECD concluded the case for inheritance taxes might be strongest in countries where the taxation of capital income and wealth was low.

Yes, that’s us.

“Evidence has shown that providing information on inherited wealth and inequality can play an important role in making inheritance taxes more acceptable for the public at large,” it added.

Well, now that evidence is coming.

So if Parker did order the IR research with no goal in mind, he may have bought the party a heap of trouble.

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