Top Scoops

Book Reviews | Gordon Campbell | Scoop News | Wellington Scoop | Community Scoop | Search


Forget A Capital Gains Tax – What New Zealand Needs Is A Tax On Inherited Wealth

Jonathan Barrett

The world’s wealthiest people will transfer US$15.4 trillion in assets to their heirs in the next decade, according to a recent report.

Published by specialist data analysts Wealth-X, the report focused on the richest 0.1% (those with net assets worth over US$5 million), but it’s a similar story for the more modestly wealthy baby boomers.

With New Zealand’s average national house price now over $700,000, the heirs of home-owning boomers (as well as people born before 1945 whose significant wealth is often overlooked) will receive a currently untaxed bonanza.

Ignoring this unprecedented transfer of wealth from people who no longer need it to people who haven’t earned it would be absurd. But equitable tax policy must first overcome political timidity and rhetoric.

As New Zealand’s election approaches, forward-thinking politicians should take heart from Sinn Féin winning a majority in the 2019 Irish election on the promise of making the country’s tax system radically more equitable.

While a capital gains tax (CGT) is off the table for now, tax arrangements are never set in stone and voters can be open to change.

Taxing inheritance is nothing new

New Zealand first taxed inter-generational capital transfers in 1866. However, the rate of estate duty was reduced to zero in 1993 and gift duty was scrapped in 2011. According to tax law specialist Michael Littlewood:

These taxes for many years enjoyed broad political support. Indeed, it was widely regarded as obvious that a significant part – perhaps as much as 50% or so – of every large estate ought to go to the state.

Taxing a person’s wealth when they no longer need it, provided a reasonable exemption is made to support dependants, has been usual since Roman times. In the modern era, inter-generational wealth was seen as eminently taxable, too. Indeed, progressive tax rates were applied to estate taxes before they were first used for income taxes.

In 1979 Australia became the first developed country to abolish estate duty (at both state and federal levels). As analysts Sam Reinhardt and Lee Steel pointed out, support for estate taxes had declined despite “various tax review committees recommending refinements to improve the equity, efficiency and simplicity of the tax”.

Politics gets in the way

In New Zealand, Te Herenga Waka—Victoria University’s 2010 tax working group didn’t consider reintroducing an estate tax or retaining the gift duty then in force. It argued that reforms in the late 1980s had “improved the efficiency and equity of the tax system”.

Certainly, stamp duty is an unlamented tax – although many jurisdictions try to use it to cool overheated housing markets. But it’s not clear why the working group considered estate taxes inefficient or inequitable.

Unfortunately, the terms of reference of the next tax working group, established by the Labour-led government after the 2017 election, specifically excluded an inheritance tax. While there were good theoretical reasons for such a tax, group member Geof Nightingale said, it “breaks down at the politics”:

Inheritance taxes are intensely disliked, so if you haven’t got one it’s very hard to put one in.

The arguments against estate taxes are well rehearsed – usually accompanied by emotive references to “death taxes”. But, in the long term, the current ideological opposition to taxing inter-generational wealth transfers may prove to be an anomaly.

One simple reason for reviving the debate about such a tax is demographic: baby boomers, the wealthiest generation that has ever lived, will increasingly start dying during the 2020s.

Tax policymakers cannot ignore the opportunity – arguably the moral imperative – of taxing and redistributing those transfers.

Millennials and Gen X will be the winners

There remain three challenges to achieving a fairer tax based on inter-generational wealth.

First, the application of tax needs to shift from the deceased to the living. In other words, we need to focus on the recipient of the wealth transfer. Ireland’s capital acquisitions tax (CAT) applies a flat rate of 33% to accumulated gifts and inheritances over the relevant threshold.

Unlike a CGT, which can be perceived as penalising business owners, a CAT targets unearned windfalls from an accident of birth. This should make a CAT more politically acceptable than a CGT.

Second, the younger generations most critical of baby boomers’ “unfair” acquisition of wealth (Gen X and millennials) must accept that taxing this unprecedented transfer of wealth will promote both inter- and intra-generational fairness.

If we don’t tax and redistribute these transfers, wealth inequalities will be exacerbated and entrenched among future generations.

And finally, arguments in favour of a more equitable system have to overcome the rhetoric of “death taxes”. As far back as the 1960s, Canada’s Royal Commission on Taxation did this by popularising the idea that “a buck is a buck”, no matter how it is earned.

In other words, if you have the money you can pay tax, whether that money comes from labour, investment or inheritance.

So far, only the Greens are proposing any tax on wealth as part of their election policy offering. But with the generational clock ticking, it’s maybe time for New Zealand to think about getting a CAT.

Jonathan Barrett is Lecturer, Te Herenga Waka — Victoria University of Wellington.

© Scoop Media

Top Scoops Headlines


The Conversation: Rogue Poll Or Not, All The Signs Point To A Tectonic Shift In New Zealand Politics

Richard Shaw AAP(various)/NZ Greens (CC-BY-SA)/The Conversation Strong team. More jobs. Better economy. So say the National Party’s campaign hoardings. Only thing is, last Sunday’s Newshub-Reid Research poll – which had support for the Labour ... More>>

Dunne Speaks: It's Time For Matariki Day

The period of Matariki, the celebration of the Māori New Year, which began earlier this week, is being celebrated increasingly as an important national event. While many other countries have their own form of New Year celebrations, Matariki is uniquely ... More>>

Gordon Campbell: On Why We Shouldn’t Be Pushed Into Re-Opening Our Borders

I believe in yesterday as much as Paul McCartney, but it was bemusing to see the amount of media attention lavished last week on the pandemic-related musings by former government science adviser Sir Peter Gluckman, former Prime Minister Helen Clark ... More>>

Gordon Campbell: On The Media Collusion With National’s Attack Lines

For most of the past week, any consumer of this country’s management of Covid-19 would think New Zealand was actually Brazil, or Texas. The media language has been full of claims of “botches” at the border, and laxness and inexcusable errors ... More>>

The Coronavirus Republic: Three Million Infections And Rising

The United States is famed for doing things, not to scale, but off it. Size is the be-all and end-all, and the coronavirus is now doing its bit to assure that the country remains unrivalled in the charts of infection . In time, other unfortunates may well ... More>>

Binoy Kampmark: Altars Of Hypocrisy: George Floyd, Protest And Black Face

Be wary what you protest about. The modern moral constabulary are out, and they are assisted by their Silicon Valley friends in the Social Media club. Should you dare take a stand on anything, especially in a dramatic way, you will be found out ... More>>

Binoy Kampmark: Welcome Deaths: Coronavirus And The Open Plan Office

For anybody familiar with that gruesome manifestation of the modern work place, namely the open plan office, the advent of coronavirus might be something of a relief. The prospects for infection in such spaces is simply too great. You are at risk from ... More>>

Binoy Kampmark: Why Thinking Makes It So: Donald Trump’s Obamagate Fixation

The “gate” suffix has been wearing thin since the break-in scandal that gave it its birth. Since Watergate, virtually anything dubious and suggestive, and much more besides, is suffixed. Which brings us to the issue of President Donald Trump’s ... More>>