A student once suggested to Milton Friedman that a 100 per cent inheritance tax might be the perfect redistributive tool: after all, the person is dead, what incentives could possibly be distorted?
Friedman’s response is obvious to anyone who understands how societies actually work: this is a family society, not an individual society.
The greatest incentives to work, save, and build come from the desire to provide for one’s children. That is why America was built by waves of migrants who arrived with nothing, took on jobs they never imagined themselves doing, and saved every spare dollar to send their children to college – opportunities they themselves were denied. The willingness to sacrifice today for the next generation is the foundation of prosperity.
Tax that away, and people will simply dissipate their wealth in consumption, leaving society without the factories, machines, and capital investment that sustain growth.
Australia has been free of inheritance tax since 1979 – a rare status among developed nations. The Labor government consistently denies any intention to reintroduce death duties. And yet, the idea refuses to die. Instead, it’s floated by The Australia Institute, a progressive think tank closely associated with left-wing economic advocacy. In August, they called inheritance tax a ‘once in a generation opportunity’ to raise $10 billion annually – a move that smacks more of ideological posturing than sound public finance.
This is a mirage: inheritance taxes generate less than 0.5 per cent of GDP in revenue across OECD countries. The UK collects barely 1 per cent of total receipts despite a 40 per cent rate; in France, avoidance means the effective rate for the wealthy is closer to 10 per cent.
So why summon up this phantom tax?
Because think tanks often float new tax concepts as public trial balloons, testing whether political parties should eventually adopt them.
And Labor’s record gives us every reason to doubt their denials. The same government has pushed for a new superannuation tax on unrealised gains – effectively a 30 per cent levy on paper profits in funds over $3 million.
That shift – taxing profits before they are realised – is a fundamental break from core tax principles, and it tells us Labor is perfectly willing to erode long-standing norms if it suits ideology.
If they’re prepared to tax assets before they’re sold, then how seriously should we take assurances that inheritance will remain untouched? In public finance, today’s concessions to ideology become tomorrow’s tax base.
The evidence is clear: when governments tax away inheritance, they corrode the drive to save and invest. In the United States, economists estimate that a 55 per cent estate tax has the same disincentive effect as doubling the highest marginal income tax rate for entrepreneurs.
In Japan, poor succession planning combined with inheritance burdens threatens to close 1.27 million businesses, destroying up to 6.5 million jobs and cutting GDP by $220 billion.
Even in Britain, where the system is riddled with exemptions, the damage is evident. Family firms – employing 13.9 million people and contributing £200 billion in tax revenue – warn that inheritance tax changes could force them to shed workers or liquidate.
One estimate place 125,000 jobs at risk, not because these firms are unproductive, but because they would be forced to sell assets simply to satisfy the taxman.
Farms fare no better. With land tied up in illiquid assets, even modest estates face impossible bills. Under current proposals in the UK, 4.5 per cent of farming estates – around 70 a year – would struggle to pay inheritance tax, leading to forced sales of land and equipment. This is not redistribution; it is the destruction of productive capital.
Inheritance is not simply about money. It is about continuity. It is how one generation affirms its bond with the next, and how a society ensures its long-term dynamism. To tax that away is to discount the very motives that sustain growth and cohesion.
You cannot end intergenerational inequality by destroying intergenerational wealth.
All you achieve is the destruction of the incentive structure that produces wealth in the first place. Without that structure, society becomes less a web of families building across generations, and more a collection of isolated individuals dependent on the state. That is not a recipe for progress; it is a recipe for decline.
If the concern is inequality of opportunity, there are better answers: reform land use to ease housing costs, expand educational opportunity, and reduce barriers to entrepreneurship. These measures strengthen mobility without dismantling incentives.
Australia’s experience since 1979 shows that a society can prosper without inheritance taxes. To bring them back would not be reform but regression. It would weaken investment, punish prudence, and threaten the very notion of a continuing society.
Trying to solve intergenerational problems by destroying intergenerational wealth is such a paradox that it borders on comedy.
If anything, inheritance tax only pushes citizens to consider moving abroad. Plenty of countries are eager to welcome wealthy new migrants – there’s no shortage of demand!
Jules Pedersen is the Executive Chairman of Newport Capital Group, Australia’s longest-established licensed M&A investment banking firm focused on Technology, Media, Entertainment and Telecommunications, with a footprint in Australia, Europe, and the United States.
Follow on X: @JulesVBPedersen
