Compared to other European countries, Germany stands out with an especially unequal distribution of wealth, which has also increased in the long-term trend. In 2020, the DIW (German Institute for Economic Research) supplemented the usual inadequate data from household surveys with information on corporate holdings and publicly available rich lists. As a result, the institute estimates that the wealthiest one percent of the population in Germany owns more than 35 percent of the private wealth, exceeding ten trillion euros, at least 1.3 million and an average of about five million euros per person. The richest thousandth owns more than 20 percent, at least 5.5 million euros per person, and an average of about 30 million. Research by the Netzwerk Steuergerechtigkeit (German Tax Justice Network) shows that even the journalistic rich lists significantly under-report the accumulation at the very top. In a first systematic analysis of German fortunes larger than one billion Euros the authors estimate that their combined wealth is at 1.4 trillion, 500 billion higher than previously estimated.

At the same time, wealth is very sticky. According to a study by Thilo Albers, Charlotte Bartels, and Moritz Schularick, the 700 most valuable family businesses mostly originated before 1918. According to an FAZ list (Frankfurt General Newspaper), the largest private forest owners in Germany are mostly old noble families. The existing inheritance tax apparently has not changed this. The wealth tax explicitly provided for in the German constitution has also not been levied since 1997. In 1995, the Federal Constitutional Court declared the existing version of the law unconstitutional because real estate was undervalued compared to other types of assets. The Christian Democratic Union/Christian Social Union-Free Democratic Party (CDU/CSU-FDP) coalition at that time was not willing to rectify this deficiency – and no other coalition has done so since.

The very high inequality of wealth – which is much higher in Germany than income inequality – is a central argument for net wealth taxation. A tax reform can specifically shave off the top of wealth distribution – the super-rich – who are also associated with not democratically legitimized political power. There is also the question of justice, as inheritances and wealth privilege individuals and families from childhood onwards compared to those who rely solely on their earned incomes.

As a second key argument for net wealth taxation, we see that it can make a significant contribution to financing necessary state investments, such as in a green economy to achieve climate goals, and to strengthen the welfare state. Especially as long as the harmful debt brake exists and German courts interpret fiscal rules strictly, high additional revenues are required, which can be generated through asset taxation without additional burden on the broad population.

The Wealth and Inheritance Working Group of the Netzwerk Steuergerechtigkeit, in which civil society organizations in Germany collaborate for the goal of a financially policy oriented towards the common good, therefore considers it imperative to return to effective taxation of large net wealth, inheritances, and gifts in Germany. We advocate not relying on a single instrument in its design but using all available instruments. This means:

• Reintroducing the wealth tax on a reformed basis;
• Closing significant gaps in inheritance and gift taxes;
• Taxing capital gains and profit income progressively, without loopholes and with increased top rates;
• and, as a further option, imposing a one-time wealth tax based on the model of the post-World War II equalization levy. This could be justified in order to refinance the extraordinary expenses and new debts in the wake of the coronavirus pandemic and the burdens caused by the war in Ukraine without harmful government spending cuts or higher mass taxes.

In this article, we discuss a sensible design of wealth and inheritance taxes as key elements of adequate asset taxation.

Basic design of the wealth tax

Given the extreme concentration of wealth, it is reasonable and sufficient, in order to achieve significant double-digit billion amounts annually, to focus taxation on the truly rich with multi million and billion-dollar fortunes. The measures thus target the richest percent of the population and not the upper middle class. A wealth tax designed in this way enjoys broad support in the population according to all available polls. Therefore, we propose a personal allowance of one million euros net wealth, after deducting all debts. Taxable would be the entire real and financial wealth, excluding consumable assets. Owner-occupied residential property within the usual scope should not be taxed. Additional allowances should be provided for tied pension assets.

The worldwide assets of domestic taxpayers should be taxed, with wealth taxes paid abroad being credited. Assets located in Germany belonging to foreign individuals should be subject to limited tax liability. The valuation of various types of assets should be uniform and close to market value. Existing valuation laws can be used for this purpose.

To make an effective contribution to limiting particularly large private fortunes, we propose a progressive rate. Assets above the allowance would be taxed at one percent per year, rising to five percent for assets above 30 million euros. In our opinion, this last wealth limit marks the transition to superwealth. Studies show that returns increase with wealth, so these taxes can generally be paid from asset returns or capital gains. Our recent study of the billion-euro fortunes (example calculations for BMW heiress Susanne Klatten) shows both that the end of the old wealth tax is partly responsible for dwindling tax rates of German billionaires since 1996 and that a reformed wealth tax – even with relatively high rates – would incur no loss of the substance but only slow further accumulation.

However, we consider taxation of asset substance to be justified or even necessary for very large fortunes as well if social inequality is to be seriously limited. A legal opinion prepared for ver.di in 2003 by legal scholar Joachim Wieland as well as a recent one by Alexander Thiele made it clear that there is no prohibition of substance taxation under the German Basic Law. Nevertheless, the current predominant legal opinion is that taxation is inadmissible if it cannot be serviced from current income. Exceptional regulations could be made for such cases if necessary. Ultimately, the constitutional evaluation depends on the concrete design of the tax and the socio-political "climate" that influences legal assessments. In addition, the Basic Law can also be clarified in this sense, allowing substance taxation if corresponding majorities exist.
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Taxation of business assets

A central question of asset taxation is how to deal with the taxation of business assets and companies. The assertion made by influential and financially powerful lobby organizations that the taxation of business assets would endanger companies and jobs is the central objection that has so far prevented effective wealth and inheritance taxation.

Especially large fortunes are predominantly in the form of business assets or can be transformed into such by incorporating assets into a company. Excluding business assets would therefore lead – and already leads today in the case of inheritance and gift tax – to systematically exempting the largest fortunes from taxation. The main beneficiaries are not small and medium-sized businesses but the super-rich owners of large business assets and share portfolios because all of this is counted as business assets for tax purposes.

Taxing business assets is therefore indispensable in terms of distributional impact and revenue potential. Exceptions should be limited to business assets necessary for the continuation of small and medium-sized enterprises. These businesses often involve a special commitment of the owners to the company and an interest in its continuation. We therefore propose providing a special high allowance of five million euros for business-critical assets in a wealth tax.

Otherwise, provisions can be found for payment difficulties, where the tax claim is not abandoned. This can be done through deferral or the government or a state fund taking ownership stakes instead of cash payments. With the state as a shareholder – naturally with proportional claims to future profits and value increases – an undesirable sell-off of assets could be avoided.

Potentially problematic for companies is taxation only to the extent that the necessary funds must be raised by the companies themselves. When owners sell shares to meet their tax obligations, it does not diminish the capital of the companies themselves but merely changes the ownership structure. The specific management of larger companies is usually handled by employed management and not the owners themselves. Public ownership shares even have a stabilizing effect, especially for domestic locations, and potentially deter problematic takeover attempts.

To close loopholes and avoid favoring companies in foreign ownership that would otherwise not be taxed, the assets of legal entities, especially of corporations, should be taxed as well. This was also the case with the wealth tax levied in Germany until 1996 and contributed a large part of the wealth tax revenue (over half up until the 1980s). The interests of corporations in other corporations should be exempt from tax to avoid double taxation.

However, the problem of double taxation of assets in the corporation on the one hand and the natural owner individuals on the other remains. The cleanest solution here would be a proportional offsetting of the wealth tax of legal entities against the private wealth tax of the owners. It remains to be seen to what extent this could be implemented with reasonable administrative effort. A pragmatic alternative would be the so-called Halbvermögensverfahren (half-asset procedure): only half of the asset value would be taxed both at the level of the corporation and of the shareholders. Such a variant is discussed in the DIW studies on the revenue and distribution effects of a revival of the wealth tax from 2012 and 2016. It was also provided for in the draft wealth tax law of the Social Democratic Party-led finance ministries of Rhineland-Palatinate, Hamburg, North Rhine-Westphalia, and Baden-Württemberg in 2012.

For the separate taxation of corporations, a high allowance does not need to be set, as this would otherwise create incentives to split companies into smaller ones. We propose an allowance for minor cases of EUR 200,000 or 300,000. This would already exclude four-fifths of the approximately 760,000 corporations. Of the 2.6 million sole proprietorships, about 99 percent would not be affected by the high personal allowance for business assets anyway.

For corporations, a wealth tax rate of one percent in the half-asset procedure would typically mean that, on average, the profit at the company level would be burdened with an additional almost five percent, less for small businesses due to the allowance. This results from the fact that, in the legally provided simplified earnings value method, the company value typically amounts to 9.6 times the average pre-tax profit of the previous three years. Considering constructed tax burdens of investments through the wealth tax, as presented by the lobby organization Stiftung Familienunternehmen (Family Business Foundation), makes little sense because it does not tax the profits generated but the overall company value. The assets would be taxed even if they were not invested, which could even create a positive incentive for investment.

The revenue effects of such a wealth tax can only be roughly estimated. Based on the mentioned DIW studies from 2012 and 2016 and the study on the revenue effects of a wealth tax from 2020, we estimate that, according to our proposal for a progressive design of the wealth tax with high allowances, over 50 billion euros could be collected annually. Administrative costs for the state are likely to be less than one percent of revenue, compliance costs for taxpayers less than two percent. This would correspond to the maximum estimate of DIW in 2016, taking into account that our tariff proposal would yield more than three times the tax revenue. Due to the progressive tax rate design, about 85 percent of tax revenue is expected to be contributed by the richest 0.1 percent of the population.
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Reform of inheritance and gift tax

Regarding inheritance and gift tax, the greatest need for reform lies in the treatment of business assets. Of an estimated 400 billion euros in annual wealth transfers, most are not recorded at all due to their low value. In 2022, 101 billion euros were tax-assessed: 58 billion were subject to tax, and 11.4 billion euros in taxes were levied. The effective tax rate, based on the total value of the acquisitions, was 11.2 percent overall. According to the latest statistics the effective rate for acquisitions over 20 million euros is at 20,9 percent. These numbers do however not reflect the reality since large fortunes can be transferred completely free of tax via the so-called Verschonungsbedarfsprüfung (examination of tax relief needs), a measure introduced in 2016 for which the first data only became public in 2022. It allows for the examination of whether a transfer of assets should be exempt from tax based on the needs of the beneficiary. The problem is that these needs can be artificially created, for example by turning a fortune into business assets and transferring them to children. This loophole led to tax-exempt transfers of 1.5 billion euros to only 24 “indigent” inheritors in 2022 which is not reflected in the official statistics. An estimated effective tax rate for these super-rich is 4,5 percent. The nominal tax rates for taxable acquisitions over 26 million euros are 30 percent, even for direct relatives in tax class I.

This is the result of the exorbitant favoritism for business assets that was enforced by the wealthy and business lobby in the last reform in 2016 and is exploited by the super-rich through the avenue of gifts and the Verschonungsbedarfsprüfung. A reform became necessary at that time because the existing benefits were declared unconstitutional. It is not unlikely that this new regulation is also unconstitutional and it is currently being challenged in front of the constitutional court (1 BvR 804/22) – but it is valid for now. The subsidy report of the federal government identifies the benefit for acquirers of business assets or shares in corporations in the event of inheritance or gifts as the largest of all tax subsidies, with 5.1 billion euros in foregone revenue in 2022 (which does not even include the revenue losses from the Verschonungsbedarfsprüfung).

We propose to eliminate all tax exemptions for business assets. To avoid liquidity problems, the tax burden could be spread over five years for private assets and ten years for business assets, provided the latter are not sold prematurely. Interest-bearing deferrals should also be possible. Due to the long payment periods, the tax does not pose a threat to liquidity and jobs for profitable companies. In addition, the option should be granted to involve the state as a hypothetical additional heir as a silent partner in inherited companies.

In fact, the frequently occurring division of companies among several heirs, some of whom then want to be paid out, is a much larger problem than a serious inheritance tax could be. In addition, we call for replacing the existing personal allowances for inheritance and gift tax, which can be claimed every ten years, with a one-time, lifelong allowance. Just by implementing these two proposals alone, the revenue from inheritance tax of 11.4 billion euros in 2022 could be roughly doubled.

Political and economic conditions

Before the 2021 election, proposals for higher taxation of large fortunes were not only coming from the German Trade Union Confederation (DGB) but also the political parties SPD, Greens (Die Grünen), and the Left (Die Linke). The DGB, for example, also calls for the repeal of benefits for business assets in inheritance tax and the reintroduction of a wealth tax with a progressively increasing rate from one percent for wealth over one million euros to two percent for wealth over one billion euros.

The proposals from the Netzwerk Steuergerechtigkeit's working group share many similarities with the proposals from SPD, Greens, and Die Linke, but are overall more extensive and concrete. Even if there is a parliamentary majority for such measures, it will be necessary to continue developing pressure from civil society for effective wealth taxation. SPD and Greens now form the current government coalition. But they did not bring this concern into the coalition negotiations, because the third partner, the neoliberal FDP, ruled this out (but we suspect, they were not sad about it). The lobby of the super-rich and business associations will continue to use considerable efforts to thwart such endeavors. The usual arguments about job endangerment will likely be put forward, even if it is actually simply about their own financial interests.

Against this, it is important to emphasize the significant positive effects of wealth taxation itself and the public spending it can finance. The net wealth tax could help reduce the likely increased wealth inequality during the pandemic in the long run. Given the debt brake, a wealth tax would additionally provide the necessary leeway for better economic development through investments in infrastructure, the socio-ecological transformation to achieve the 1.5-degree target, and increased employment in education, healthcare, and public services.

Wealth tax and a fairer inheritance tax are not novel experiments. Wealth taxation was much more pronounced during the Wirtschaftswunder (economic miracle) years after World War II than it is today. The instruments are not obsolete but have simply not been politically opportune in recent decades. We believe the time is ripe to reconsider the potential of wealth taxation. Concepts for implementation are available for our politicians to use.

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Disclaimer: This article is a translated version of an article that was originally published in German language as part of the Economists For Future Debate Series. Hence, some of the linked references are in German. 

About the author:

Ralf Krämer and Yannick Schwarz are involved in the Netzwerk Steuergerechtigkeit, advocating for a financial policy oriented towards the common good. Ralf Krämer works at the Federal Executive Board of the Vereinte Dienstleistungsgewerkschaft, a union, in the field of economic policy and serves on the board of Netzwerk Steuergerechtigkeit. Yannick Schwarz is the former coordinator of its Working Group on Wealth and Inheritance.