University of Auckland tax expert Mark Keating puts his case for death duties as a way of helping to reverse growing inequality

It was one of the US founding fathers, Benjamin Franklin, that is credited with first stating the obvious that: “‘In this world nothing can be said to be certain, except death and taxes.”

Revelations of the trifling New Zealand tax bills paid by certain tech giants and others show at least some multinational corporations are doing their legal best to ensure that one of those certainties does not apply to them.

But it is interesting how little discussion there is in New Zealand about the tax effects of the other certainty: death duties.

We all know that New Zealand is the only country in the OECD that still does not have any form of capital gains tax. (Yes we do tax a limited range of capital gains as if they were income but they are the exception).

This absence of tax on capital gains appears out of step with the increasing recognition that the wealthiest few Kiwis are accumulating a greater share of national wealth, and that most of that accumulation comes from untaxed capital growth rather than growing taxable income.

But after the Labour party dropped its proposed capital gains tax after the last election there is now no political will to fill this gap in our tax system.

Nevertheless, an even bigger inconsistency which is almost never raised is the total lack of gift or inheritance taxes in New Zealand. Again, we are almost unique in the OECD in not imposing some form of tax on intergenerational wealth transfers.

A leading tax textbook notes: “there is often a social policy intent behind inheritance taxes … it was introduced as a means for preventing the accumulation of wealth in the hands of those who had not earned it.”

From as early as 1866 New Zealand had a mix of both inheritance taxes and gift taxes (generally imposed to stop individuals gifting away their assets prior to death in order to avoid the imposition of death duties). The rate of death duty fluctuated over the following century from very low rates to its peak of 60 percent under the Labour Government in 1958 (as part of Arnold Nordmeyer’s “black budget” that year).

Significantly, the politicians at the time saw the dual benefits that an inheritance tax created, with one speaking in Parliament during an increase in the applicable rate in 1909 explaining:

“There is an opinion rising up not only in this country, but in Great Britain, and also in America and Germany, that all taxation should aim not only at the raising of revenue, but also at the more equitable distribution of the wealth which the community produces … after all, what good does money do for those who inherit it? If you want to see a failure in life, give me the child who inherits so much wealth he [or she] never needs to work.”

A century ago few would question the wisdom of that view.

Over the subsequent 100 years two variables affected the imposition of death duty:

* The threshold value of estates that became subject to tax (was it only the very rich or the middle classes whose inherited property should be taxed?); and

* The rate (or often rates) of tax applied (should all estates pay the same rate or, like income tax, should the wealthier estates pay a higher rate?).

Due to changes in those variables the amount of inheritance tax (and therefore the share of Government revenue it raised) fluctuated widely. In 1915, it accounted for 13.5 percent of government revenues; in 1935 that had dropped to 8.8 percent; in 1955, it had halved to 4 percent; in 1975, it was down to 1.4 percent; and by 1990 it was just 0.3 percent.

This decline largely reflected the inherent opposition of post-war National Governments to inheritance taxes, which saw the scope of the tax narrowed, thresholds increased and rates lowered over time. As a result, by 1993 it was easy for the then-National Government to abolish death duty entirely. Gift duty was also finally abolished in 2011.

New Zealand is not alone in abolishing death duty. But all other countries that have done so, including Australia and Canada, impose an indirect form of death duty by taxing the transfer of inherited assets under their standard capital gains taxes.

This leaves New Zealand alone among comparable countries that impose no tax of any kind on inheritances regardless of their value. Whatever the quality of the Kiwi lifestyle, New Zealand has become a great place for the wealthy to die.

This omission seems even more glaring as we experience significant demographic change with the baby-boomers (the wealthiest members of society) rapidly ageing.

For instance, after years of static returns in 2014 the UK revenue gained a 20 percent increase in death duties directly attributed to the rising death rates suffered by an ageing population. Death duties now return £4.6b, or approximately 2 percent of total UK revenue.

An equivalent tax applied in New Zealand would raise approximately $600m.

Despite this, when reviewing the future of the New Zealand tax system in 2010, the Victoria University Working Group (which recommended the increase of GST to 15 percent and nil depreciation on buildings) did not even identify death duties as an option for consideration. This is not surprising since even dedicated taxes courses at our universities do not address the topic.

If we are truly concerned about growing inequality, then a broad based and low rate of death duty would start to rebalance the ledger. After all, death duty may be one of the few taxes that no human can avoid.

Mark Keating is a Senior Lecturer in Tax Law at The University of Auckland Business School.

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