christopher kremmer
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COMMENTARY |
THE NEW PLUTOCRATS by Christopher Kremmer Australians are pretty laid back bunch when it comes to other people's good fortune. We do not, as a rule, resent the wealthy. Our national anthem hails 'wealth for toil', and most of us hope our own toil proves financially rewarding. But the accumulation of incredible wealth by a tiny minority of Australians in recent years—much of it generated from the sale of mineral resources that are the nation's inheritance—will, on current policy settings, result in the emergence in the coming decades of a new class of super-rich in Australia. Born to privilege and never needing to work a day in their lives, their tax-free inherited wealth will reach into the hundreds of billions of dollars, bestowing on them an unprecedented power to influence the course of Australian life. They will live in aristocratic splendour on massive, feudal-style estates protected from tax by the capital gains tax exemption on the principal residence. Australia is out of step with most of the developed world in having no policy to deal with this development. In the coming decades, huge unrealised capital gains will pass untaxed to the next generation of Australia's wealthy elite. Those billions—which could make a major contribution through the tax system to building Australia's infrastructure for the future—will be spent playing the stock market or indulging the expensive tastes of our new gentry. How do the world's leading economies manage this issue? In Great Britain probate has been imposed in various forms since as early as the late 1600s, and in the United States, estates valued at more than $2 million (or 44 million for couples) attract federal tax at a top rate of around 55 per cent, discounted for charitable donations the owners have made. Some of the strongest supporters of estate levies have come from the Conservative side of politics. Sir Winston Churchill called them "a certain corrective against the development of a race of idle rich", and some of America's wealthiest men, including Warren Buffet and William Gates Senior, father of the Microsoft Corporation founder Bill Gates, are strong supporters. Just last year, The Economist, a British magazine economic rationalist credentials are impeccable, declared its support in the following terms: "A thriving economy will generate great fortunes, but there is good reason to check these becoming entrenched through inheritance. The estate tax offers a modest counterweight against the development of a new plutocracy to rival the industrial barons of America's Gilded Age. Furthermore it also taxes wealth built up through windfalls rather than thrift and effort. For example, recent gains in the housing market have accrued mainly to people who happen to belong to the right generation and who own property in the right places. Bill Gates senior, author of Wealth and Our Commonwealth: Why America Should Tax Accumulated Fortunes, says the wealthy owe a special debt to societies that have fostered their enterprise. Most of the things that have generated the enormous advances in the American economy, he says, "started on some campus or in some laboratory. And most of those are because the government financed it." Says Gates senior, without an estate tax, the wealth of the privileged few could grow to a point where they have too much control over the national agenda. Rich Americans are increasingly limiting bequests because they believe easy money will ruin their children's lives. In Australia too, wealthy entrepreneurs these days prefer to sell up their estates and split the proceeds rather than force their kids to maintain the family business or home. By liquidating their own assets they challenge the perception that a tax on their assets would wreck the family business or force the sale of their mansions. But the more important difference is this: America's rich are modestly taxed on their estates. Ours' aren't. Probate in Australia was abolished in the early 1980s after Queensland's National Party premier Joh Bjeke Petersen sacrificed good policy to bad politics, and the other states followed. The reason they followed is telling. After Queensland changed its laws, a grey wave of elderly tax minimisers from other states became honorary banana benders. Any estate tax or levy in future would need to be nationally based. "Death duties" is the term people opposed to this reform use to create unjustified fears about what economists regard an efficient and fair form of taxation. If, as it will on current policy settings, the gap between rich and poor in Australia continues to widen, the scare campaigns that have demonised estate levies in Australia may lose their bite. After all, it is difficult to see why families hit by the housing affordability crisis and struggling to rent homes, let alone buy them, would feel alarmed by a tax on wealthy estates. In the United States, only about two per cent of all estates attract tax. In Britain it is around six percent. In France, the inheritance tax—which taxes beneficiaries instead of the estate itself, is designed so that distant relatives pay more than children. Whatever mechanism is used to tap inherited wealth, it needs to be simple and efficient, so as to reduce compliance costs, which in earlier schemes were excessive. Firm guarantees against bracket creep, which could otherwise force middle class families into the net, are essential. The level at which such a levy kicks in would have a great bearing on its political saleability, which could also be enhanced by nominating a specific purpose for monies raised, whether for hospitals, schools, or infrastructure. The fact is that, in the absence of an estate levy in some form, other ways of correcting the imbalance in the tax system will need to be found. Limiting the capital gains tax exemption for principal place of residence only to properties worth less than ten million dollars would be one option. According to the World Wealth Report, the wealthiest 200 Australians in 2006 saw their total wealth rise by a massive 26.7 per cent in a single year to a collective $130 billion dollars, mainly through the resources boom and share holdings. That's enough to fund the entire Australian defence budget for six years. The top 200 individuals had an average estimated worth of more than $600 million each. Recent research by Queensland University of Technology's Australian Centre for Philanthropy and Non-profit Studies suggests they are not the world's most generous people. America's wealthy give eight times more in charitable and associated donations as a percentage of their income than their Australian counterparts, researchers Dr Kym Madden and Dr Wendy Scaife found. By allowing the recently departed rich to hand-pass their dizzying wealth tax- free to their offspring, Australian governments place a heavier than necessary tax burden on the living. John Howard was able to sell the politically unpopular Goods and Services Tax, and there is no reason why a similarly courageous prime minister now or in the future could not make the case for an estate levy. However they do it, current and future governments need to address the problem of massive inherited wealth. And the public needs to make sure they do so. Australia's super-rich today are so awash with money they barely know what to do with it. In such circumstances, complaints about the re-introduction of estate taxes on the wealthy would be just plain greedy. This is an edited extract from 'Greed', the opening lecture of the Sydney PEN Voices '3 Writers' Project 2008, to be delivered on Wednesday 30 July at 6.30 pm at the Alistair Mackerras Theatre, Sydney Grammar School, College Street, Darlinghurst, Tickets are $22/$12 Concession available through MCA Ticketing on 1300 306 776 or http://www.mca-tix.com An edited version of the above article appeared in the Sydney Morning Herald on Monday 28 July 2008 |
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