Death tax might not sting as much as expected

It is this: "I have enjoyed roads, education, health, police, defence and a myriad other things provided by the government all my life, so shouldn't I pay a little tax when I die?"

Similarly, there is a corollary to the refrain: "I have worked hard all my life to build up some wealth so I am entitled to leave it to my kids or whomever I want?"

It is this: "Why should some people get a richly undeserved windfall just because they are lucky enough to have wealthy parents?"

This election campaign the major parties have both vehemently denied they want to impose death duties, for the obvious reason that the two words represent the shortest political suicide message in history. That is why each has accused the other of having a secret plan to introduce death duties - or more correctly, an estate or inheritance tax.

Yet estate taxes have a lot going for them.

Remember, the governments of the great Liberal Party statesman Robert Menzies imposed them throughout his tenure. They had been introduced at the federal level during World War I to help the war effort. They had been imposed by all the Australian colonies and kept when they became Australian states in 1901.

But by the early 1970s the usual pattern of Australian taxation emerged. Wealthy people used sharp accountants to avoid the tax. Governments failed to index the tax so inflation resulted in fairly modest estates being caught, especially businesses and farms.

Further, instead of intelligently modifying and tweaking the tax, governments went for the simple solution: abolition. It started with Queensland under Joh Bjelke-Petersen in 1977 and the other states followed for fear of a flight of people and capital to Queensland.

By the early 1980s there were no more estate taxes in Australia. Instead, the states imposed some of the worst sort of taxes imaginable: payroll tax, which discourages employment, and gaming taxes, which tempt states to relax gambling restrictions with all the attendant social misery.

This is why all the major tax reviews since have recommended the reintroduction of estate taxes, as do most economists. Australia is one of the very few developed countries that does not have them.

Even so, most countries tax only very large estates and have exemptions for spouses. In the US only about 2000 estates a year get taxed - those over about $11 million.

Britain, on the other hand, has a fairly savage tax. It applies to estates over a mere $600,000 and does not totally exempt the family home. It is imposed at an astonishingly high 40 per cent of everything over the threshold. Britain also imposes a gift tax to prevent avoidance. The OECD average is about 15 per cent but that figure is fuzzy because of thresholds and exemptions.

The trick is to get the balance right. The US position is hardly worthwhile and the British position verges on the confiscatory.

But a modest tax on estates over, say, $2 million with exemptions or postponements for spouses and family farms and businesses has a lot of merit if a government can point to other tax relief and/or worthwhile spending.

In the past few years, as increasing malfeasance is uncovered in the deregulated, privatised corporate world and government services get squeezed, voters are becoming less averse to higher taxation if they see more and better government services provided.

So we should not see estate duties as an anathema. A really smart state government would introduce an estate duty and abolish payroll tax.

Businesses would flock to that state and if a few elderly people fled the state, so what? They would be relieving the state of a lot of aged and health care in doing so.

Payroll tax is about 5 per cent and cuts in at about $1 million per payroll, depending on the state. It raises about $23 billion a year, nearly 30 per cent of state revenues. But it is more economically stupid to tax employment than to tax unearned inheritances.

Moreover, if you tax inheritances you reduce inequality, which hinders the economy and society in general.

It is bizarre that the one unpredictable, unscripted item that has come up in this election campaign has been decried a "fake news". Yes, there was a certain amount of truth-stretching by the two major parties about each other's position. But the underlying truth is not fake. Here we are aghast at even any discussion about estate taxes or death duties, yet we blithely carry on with a tax we should be aghast at while unemployment is about 5 per cent and under-employment about 9 per cent.

We should not be taxing the productive and distorting the economy we should rather be taxing unearned income.

Prime Minister Scott Morrison was right four years ago as Treasurer not to rule anything out (including death duties) when reviewing tax. Otherwise why bother with a review? He is now being pasted for that quite reasonable approach. Similarly, the Coalition is using baseless tweets to completely misrepresent Labor's position.

It shows how impossible sensible changes have become. Change necessarily means some people will be worse off, but done well the economy and society as a whole will be better off.

In this populist, social-media-driven, short-attention-span political environment it will take a very patient and brave government to explain the merit of removing a tax on jobs and instead imposing it on death.

Speaking of the election, we are seeing an increasing number of pre-poll votes. It may top 20 per cent this election. It was 18 per cent in 2010. People can make any excuse to say they cannot attend a booth on polling day. A lot of people have already made up their minds and just want the government out.

These votes are not counted on election night. They are checked off after election night to see if the elector has voted a second time on election day and if so the pre-poll vote is destroyed.

In past elections, these votes have favoured the government. My guess is that this time they will not. If the swing is not as large as the polls suggest, things will look a lot better for the Coalition on the night than the reality, but we may be waiting some time for a definitive result.

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