II. Appraisal

26.10. In all appearance wealth tax is a broad-based levy upon capital. There is a case for having such a levy upon capital in a progressive tax system as a supplement to the taxation of current income, chiefly because it provides a convenient mode of indirectly taxing ‘imputed’ incomes and because it may put a brake on the accumulation of excessive personal fortunes.

26.11. The Committee agrees that the Australian taxation system should contain a method by which capital is taxed. The question is then whether capital taxation should take the form of an integrated estate and gift duty and a capital gains tax (both of which are being recommended by the Committee) or an annual wealth tax or some combination of these taxes.

26.12. As regards the objective of limiting the excessive accumulations of personal wealth, it is important to note one feature of existing wealth taxes. In all the European countries in which they have been in operation their rates have been set so low that, it has been stated, ‘the net wealth tax is really intended to tax the annual yield of capital rather than the principal itself as do death duties or a capital levy’. Thus despite their form they are in practice no more than additional income taxes, as is made especially clear when ceilings are placed in terms of a fraction of income on the combined total of the two taxes.

26.13. For a wealth tax to have a significant effect in breaking up large estates in the lifetimes of their owners it would have to be at far higher levels than any adopted overseas. Even if this were administratively practicable (which for reasons discussed

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later is much to be doubted), the effects upon incentives to work and save, not only among those already in the high wealth brackets but among those who are still seeking to achieve wealth, would be extremely serious. The Committee believes that the taxation of wealth at death has much less disincentive effect than taxation during life.

26.14. It is often argued that, from the point of view of economic efficiency, the tax is a way of improving the structure of community asset holdings. Property owners, so the argument runs, have a stronger inducement than under an income tax and estate duty to shift from assets yielding little or no money return—cash balances, idle land, works of art and the like—to assets with a greater money yield. However, this contention is subject to considerable qualifications. Firstly, the tax would tend to deter both the investment of capital in new enterprises, large and small, from which no immediate return or only an inadequate return can be expected for some indeterminate period and also the injection of fresh capital into existing enterprises which, though on past performance not showing an adequate return, have the possibility of future profitable operation. Secondly, the inducement provided by the tax to turn to high-yielding investment is one that cannot be said to be a sound stimulus except for those who are skilled in the management of monetary affairs for it is probably a general rule that a high return reflects the element of risk of loss of the investment. Thirdly, the trustees of deceased estates and inter vivos trusts in many cases have not the liberty to shift the trust capital into any form of investment they choose: because of the desirability of ensuring security for widows, infant children, the elderly and the incapacitated, they are restricted by the provisions of the trust instrument to investments which, owing to their low risk rating, usually return a low yield. Even where the range of investment is unrestricted, trustees may be open to attack by their beneficiaries under the general law if they incur losses in jettisoning security for the prospect of high income returns. The same type of situation confronts those who have the management of superannuation funds; and there are other categories, such as retired persons, who depend upon the safety of a regular income from low-yielding assets rather than run the risks which are usually inherent in high-yielding investments.

26.15. One argument used for preferring a wealth tax to estate and gift duty, or for having one as a mere supplement to the latter, is that it provides a check against the evasion of income tax. It does not seem to the Committee to be cogent. Without all the complications of actually taxing assets, it is open to the authorities to require a list of assets to be included with an income tax return if this were thought helpful in checking the return. But it is doubtful whether in practice it would be of much assistance. The hardened tax-dodger would find it as easy to conceal assets as income, or indeed easier, and the honest taxpayer might well feel it to be an intolerable intrusion of his privacy.

26.16. Though the arguments just used for preferring an estate and gift duty to a wealth tax on grounds of equity and economic efficiency may perhaps be disputed, there can in the Committee's view be no doubt where the balance lies when the two varieties of capital tax are compared in terms of administrative simplicity and compliance costs. In these respects, the Committee's view is decisively against a wealth tax and in favour of relying on an integrated estate and gift duty coupled with a capital gains tax to achieve the purposes of capital taxation.

26.17. Whatever be the complexities of an integrated estate and gift duty, the administrative difficulties and compliance costs of wealth tax, if the experience of overseas countries is any guide, are likely to be substantially greater, particularly because the tax must be assessed on an annual valuation basis. It is true that a gift duty may

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have to be paid from time to time by the same taxpayer, but estate duty is paid once and for all and on an occasion when estates must in most cases be valued for the purposes of their own administration. A capital gains tax is paid whenever a gain is realised on the disposal of an asset.

26.18. The administrative problems would be especially acute if considerations of equity and economic efficiency were paramount since, among other things, that would entail the identification and consistent valuation of all forms of wealth which may be subject to the tax and, if the tax were a progressive one, a definition of the taxpaying unit that minimises scope for tax avoidance by, for example, wealth splitting. Certain kinds of assets, such as cash, paintings, antiques and jewellery, would be difficult for tax administrators to track down.

26.19. The greatest administrative difficulties lie in the annual valuation of assets, and in times of inflation these difficulties are compounded. In principle, valuation should accord with the fair market value of assets, that is to say, the price assets would fetch if sold in the market at the time of assessment. Valuation of liquid assets such as cash balances, listed shares and debentures would not be difficult but other more illiquid assets such as real estate, farms, shares in private companies, works of art, antique furniture and stamp and coin collections, about which there may be wide differences of opinion as to value, would present major problems both with regard to assessing fair market values and revaluing these assets annually. These latter valuations would be required if an annual wealth tax were to be levied on an equitable basis as between the owners of wealth held in liquid and illiquid forms. Such valuation of land as exists in Australia is not on a uniform basis and would rarely be suitable for wealth tax purposes. Characteristically, some countries use values determined only periodically or by some special valuation procedures in dealing with real estate. In West Germany, for example, land values (apart from farmlands) were assessed, up to 1973, on values prevailing in 1935; they are now based on a method that produces a figure estimated to be only about 35 per cent of current market value. In the Netherlands, the method of valuation produces a figure of about 40 per cent of current market value.

26.20. Farmland in European countries imposing wealth tax tends to be valued well below its market price. Even in Norway, where the wealth tax hits farmland hardest, the land is valued by boards manned by both tax officials and locally-elected members of the community to ensure that few farms are assessed at even two-thirds their market value. In Sweden agricultural land is assessed at three-quarters of the market value based on the statistical average of free market prices in the two years before the assessment. In the Netherlands land is separately assessed in discussion between the taxation authorities and organisations representing owners and farmers and always at a large discount on real values so that the tax can be paid out of the profits of the land; and there are exemptions for farms operating at a loss. Forestry land is assessed in most countries at about half its true market value despite large increases in timber values in recent years. In addition to farmland, associated assets tend to be brought to tax well below market price. In Denmark, for example, livestock is valued at approximately half its market price and farm machinery at its book value.

26.21. The administrative complexities of the tax can thus produce substantial inequities and non-neutralities in its operation. This can be illustrated by reference to Swedish experience. There, those holding wealth in the form of bank balances, quoted stocks and shares, and cash pay on the full market value of their wealth. Wealth held in certain other forms, however, is generally not taxed at its full value.

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For instance, the value of real property is invariably below market value because the assessment board's valuation is deliberately cautious as prices may fall between assessment dates, while in practice inflation has widened the gap between assessed and fair market value over the five-year period between assessments. Similarly, personal chattels are taken at the taxpayer's valuation which is rarely challenged by the authorites, although it is realised that these assets (when declared at all) are generally included in the taxpayer's return at a nominal rather than a true value. Unquoted shares receive yet another treatment. Where, for example, such shares are held in a private company with a small number of shareholders, valuation is based on the tangible assets with no attempt to include goodwill or other intangibles. This procedure generally results in undervaluation. Where the number of shareholders is large, the method used is to multiply the dividends of the company by the reciprocal of the average dividend yield of listed companies in the same industry, with a very small reduction then being made for the lower price at which unlisted shares normally sell compared with listed ones. The results of this valuation process are necessarily arbitrary. One Swedish study has concluded that valuations of unquoted shares for wealth tax purposes are generally substantially below the realised values on sales of such shares that have taken place within a short period of the time of assessment.

26.22. It would be unrealistic to imagine that inequities and non-neutralities such as these could be avoided in Australia. Particularly because of the large rural sector, more wealth is probably held in an illiquid form in Australia than is the case elsewhere.

26.23. From the point of view of the implementation of the wealth tax there are difficulties in the case of both inter vivos trusts and trusts created for the administration of deceased estates. Problems in the valuation of the trust assets will arise where the trust estate or some part thereof is held for a life tenant and remaindermen. To cast the whole of the liability for the annual payment of the tax on the life tenant seems clearly unjust and in many cases will be impractical. The difficulty is to arrive at some fair allocation of that liability between the life tenant and remaindermen when the time of death of the life tenant is uncertain and, as frequently occurs, the identity of the remaindermen ultimately entitled to the capital may not be known until that death occurs. Even where the identity of the remaindermen can be established the question will arise as to the source of the income with which to meet the tax; as infants are those who are so constantly entitled in remainder, this is a serious obstacle to overcome. There are various other problems for a wealth tax in the area of trusts but enough has been said to indicate that its application to trusts would require compromise and arbitrary rules which would add to the complexities, inequities and non-neutralities already referred to.

26.24. As has been repeatedly emphasised, the effective discussion of taxation policy in this country is hampered at every turn by the lack of reliable data about the distribution of income and wealth. Without information about the latter, neither the effect of the widened estate duty base nor what a wealth tax could produce can be at all accurately estimated. For these and many other purposes a merely statistical inquiry into the distribution of wealth, quite divorced from any immediate tax liability for those providing data, would be valuable. A sample investigation (supplementary to the new investigations of expenditure) should in the Committee's view be considered as a first step. Apart from the statistical information it would yield, the collection process itself would clarify some of the problems of the definition and valuation that a wealth tax would face were its introduction ever to be re-examined at some future date.