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Is reintroducing inheritance tax the solution to our housing affordability crisis?

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The rate of homeownership among younger Australian has dropped sharply in the last four decades as the dream of home-ownership has edged further away, but reintroducing inheritance tax could be the solution. Inheritance taxes, or death duties, were repealed in 1979.

That’s the view put forward by Australian Institute for Business and Economics director, Professor John Mangan in a recent report he led for the University of Queensland.

“Inheritance taxes present an opportunity to capture a portion of this tax and apply it directly to address housing affordability, reducing less equitable or efficient forms of tax, and or funding expenditure – such as education – aimed at improving equality of opportunity,” Mangan said.

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Noting that the rate of household ownership among 25-34-year-olds has slumped from 60 per cent to 45 per cent between 1981 and 2016, Mangan said the average wealth of older households has rapidly grown.

“If housing affordability concerns persist, inheritance of property can further drive wealth disparity.”

He said a major factor in this is home ownership and the inflation of property prices, at the same time as the rising house prices has meant younger households haven’t been able to get in.

“If housing affordability concerns persist, inheritance of property can further drive wealth disparity.”

Researchers Jeffrey Lin and Filip Milosavljevic also contributed to the report, Back from the dead: Australian inheritance tax, which found that transfer of wealth between generations is slowing.

“These changes have significant implications for welfare across generations, and contribute to the issue of equality of opportunity within Australia,” Mangan said.

“By redistributing a portion of inheritance taxes to issues like housing affordability, we allow more people to enter the housing market without the benefit of inheriting a home or money from their parents, creating more equal opportunity.”

How would it work?

While Australia has historically had inheritance taxes, they declined in popularity due to their relatively low exemption thresholds, their lack of consideration for inflation and the challenges they placed upon widows.

Additionally, farms often had to be sold or fragmented to meet death duty liabilities.

But while they were repealed here in 1979, they are still levied around the world in various forms.

Source: Back from the dead: Australian inheritance tax

The researchers noted that as Australians live longer, the age at which an inheritance is received is also older and the recipient more likely to be well-established.

“The way in which this wealth is distributed to the next generation will have important implications for Australia’s equality of opportunity, overall welfare and prosperity,” they said.

“If deceased pass the majority of their wealth to an increasingly older generation, which have had the opportunity to accumulate wealth, thus being already financially established, this would further drive wealth inequality between age groups.”

They suggested that an inheritance tax be aligned with gift taxes, so gifted wealth isn’t immune.

And, strategies should be put in place to alleviate the potential ill-effects upon small business owners and farmers, and the tax shouldn’t be levied against those who can’t afford it.

“Critics argue that compounding the grief of the deceased’s family with a “death tax”, seems heartless,” the researchers acknowledged.

“However, this does not mean that taxing at death is also ineffective.”

They said it’s important that the tax is reframed from a “destroyer of wealth” to a social benefit, but warned that more research needs to be done on how high-net wealth households would respond to such a tax, and what implications this would have for its efficiency.

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