Many left-of-centre politicians are currently in favor of a higher inheritance tax. It would be much better to finally make the existing system fair. A “flat rate” in the event of inheritance would be suitable.
When the state needs money – and it needs it now more than ever – there is always a call for higher taxes. Demands for a higher top tax rate or the reintroduction of the wealth tax, which has been suspended for constitutional reasons since 1997, quickly arise. Many left-of-centre politicians are currently in favor of a higher inheritance tax as a guarantee for higher state revenues.
Now it’s easy to argue why the state even holds out a hand when the assets left by a deceased pass to their relatives. This wealth either arose from earned income; then it has already been taxed. Or it came about illegally.
But then that would be a matter for the judiciary and not for the tax authorities. However, since the state tends to tax everything if possible, it also applies to inheritances. Today, no party dares to challenge it.
The call for higher inheritance tax is not only justified by the associated additional income. At the same time, the proponents want a more equal distribution of wealth. In fact, wealth is unequally distributed in our country.
Whereby the pioneers for a redistribution always resonate with a portion of envy. For example, inheritances are often referred to as “non-performing income”. Which is nonsensical. An inheritance is not an income. At best, income can flow from it, for example in the form of dividends from inherited securities or rental income from real estate.
Every year, 300 to 400 billion euros are inherited or given away in Germany. The Treasury only benefits from this with around 11 billion euros. That’s not too much. Of course, one has to take into account that many heirs do not have to pay any tax because inheritances of up to 500,000 euros for spouses and 400,000 euros for children remain tax-free.
What goes beyond that is taxed at 7 percent for spouses and children up to 75,000 euros. The tax rate then rises to 30 percent – from 26 million euros.
These allowances can be used for donations every ten years. Wealthy parents can therefore transfer assets worth up to 400,000 euros to their children every ten years. The consequence of this is that the inheritance – and thus the inheritance tax – is significantly lower. However, the parents run the risk that the recipient will not use the assets in their interest.
Grandma’s house can usually be inherited tax-free, provided it is not in one of the expensive metropolitan areas. A large part of the large and large fortunes inherited each year do not consist of swanky villas, outrageously expensive yachts or valuable works of art. Rather, it is in the approximately three million family businesses.
These family businesses form the backbone of our economy and employ 60 percent of all workers. Anyone who reduces this wealth in the event of death by paying a high tax ultimately taxes those who create and maintain jobs in this country. That would dampen rather than boost growth.
Germany’s family businesses are the envy of the whole world. There are more than 4,500 such companies with an annual turnover of 50 million euros and more. Among them are many “hidden champions”, companies that are largely unknown to the public and play a major role in their industry, including quite a few world market leaders.
The legislator prefers family businesses for good reasons when it comes to inheritance tax. For businesses valued under $26 million, descendants can be exempt from inheritance tax if they continue in business for seven years. In these seven years, however, the total wages – i.e. the sum of all wages and salaries – must not fall.
This avoids the heirs possibly having to sell parts of the company in order to pay the inheritance tax. Or that they involve investors from outside the family, which would significantly change the character of a company that has been successful for generations, if in doubt not to its advantage.
This leads to results that can certainly be described as unfair. Children who inherit 5 million in securities or real estate have to pay taxes on them. Children who inherit a company worth 5 million and run it for seven years don’t pay a euro in inheritance tax on it.
The reform for the new property tax is complex – and this year it will require owners. You have to submit some data to the tax office. You have to be very precise and observe special deadlines. In our large guide you will find all the information you need to know in a compact form.
This has undoubtedly benefited our economy with the family businesses as the backbone, but of course contradicts the principles of fair taxation. Market-oriented economists such as the head of the Ifo Institute, Clemens Fuest, see this as well. During the debate about the amendment to the inheritance tax in 2016, he had already pointed out that the “combination of high tax rates and exemptions for companies” could not lead to a fair and economically viable inheritance tax.
The proposal is Ifo bosses: an inheritance tax of 8 percent “on everything”, whereby the previous exemptions should remain. Fuest: “That would be the simplest and fairest solution”. An inheritance tax of 8 percent would not endanger medium-sized companies, especially since the tax payment could be spread over time.
However, Fuest’s proposals did not meet with much sympathy among medium-sized companies. There they fear that – once “8 percent on everything” were the rule – the tax screw would be turned very quickly. The CDU/CSU and FDP also prefer to stick with the current practice.
The redistributors on the left side of the political spectrum are also not interested in a “flat rate” in the event of an inheritance. They want significantly higher tax rates, they want “the rich and super-rich” to get their hands on it. They don’t seem to care about the economic impact.
Before the general election, the SPD called for minimum taxation for the transfer of company assets. This is intended to prevent “overprivileging” of large business assets. If the Greens had their way, the inheritance tax would rise significantly by preventing the “tax structures” that are currently permitted. In the traffic light coalition, however, this would fail due to the veto of the FDP.
While in Germany there are regular calls for higher taxation of inheritances, many countries around us have abolished inheritance tax. Even former welfare states such as Sweden or Norway no longer levy this tax; Austria also refrains from doing so.
Incidentally, as far as the complaint about injustice is concerned: the current inheritance tax is by no means primarily responsible for the existence of large fortunes. Large fortunes are usually the result of economic success. And even the largest fortune dwindles quickly if the heirs are unable to increase it. In any case, envy is always a bad advisor – also in every tax debate.