Every year, the wealth tax debate rekindles - currently it is about to become a jealous debate once again. The focus should be more on the question of which taxation of assets makes sense for the economy and society. This would produce a different and more differentiated picture of wealth tax.
Three questions are neglected in the analysis of wealth tax.
First, how should wealth and income be taxed to make better use of the potential of our society and thus increase prosperity for all?
The fact is that hardly any industrialized country pays so little wealth and income at work as much as Germany. The German state accounts for less than one percent of economic output in wealth taxes. In France, Great Britain or the USA it is fourfold.
Above all, people with low earned income have to bear a comparatively high tax burden in Germany. The German welfare state does not make it attractive for many people to work more. Income taxes, coupled with a strong so-called transfer-withdrawal rate, often mean that low-income people are deprived of most of their additional income. The result is that many people do not work at all or work significantly less than they actually want.
A smart tax system also provides better incentives for companies to invest, especially in innovation and productivity. Last but not least, Germany has so little investment because the tax system discriminates against equity, innovation and risk behavior . Tax incentives for capitalizing private investment are therefore reasonable - but this does not explicitly mean income tax cuts for high earners. Contrary to the prevailing myth, they are the wrong instrument to activate investment.
In short, a smart tax reform would shift the tax burden significantly from labor income to wealth, and would, above all, relieve low labor income.
The second question is: how should wealth creation be promoted, so that as many as possible can live from their own work and act independently, without becoming dependent on the welfare state?
Germany has the highest inequality in private wealth within the euro area. Unusual is not the high wealth of the "rich", but the fact that 40 percent of Germans have virtually no assets, no savings - for themselves, for their family and children, for retirement or for emergencies.
This drives many into the dependency on a welfare state, which is becoming less and less efficient in the face of demographic change. A wealth tax per se, however, will not change this problem. But it is the low income, interrupted employment biographies and the unusually large low-wage sector in Germany that prevent many people from taking precautions and building up savings.
And the third question is: how can private assets be better mobilized to act more in the interest of society as a whole?
The answer is that much of Germany's private wealth already makes a vital contribution to the economy and society today. A large part of the assets are in the form of small and medium-sized family businesses that operate in the long term and create well-paid and secure jobs.
A smart wealth tax must therefore very accurately distinguish between different forms and functions of assets. A tax relief and not a burden on family businesses is in many cases the much better option.
The problem in Germany is rather that passively or passively acquired wealth is taxed unusually low. This is mainly due to the low taxation of land.
More than half of the total private wealth in Germany today was not created with own hands work, but acquired through inheritances and donations. Each year, up to 400 billion euros are inherited or given away. However, the state takes less than seven billion euros in inheritance taxes. The perfect thing is that people with less than € 500,000 in inheritances pay more than ten percent in taxes, people with more than € 20 million in inheritances but less than two percent.
This has nothing to do with tax justice or equal treatment. The often-argued argument of corporate taxation of inheritance taxes is nothing more than a false myth lacking any foundation.
From this, three conclusions can be drawn:
- 1) Germany would benefit economically from a tax reform that relieves labor income and puts more strain on wealth, as most other countries do.
- 2) Before considering tax increases, policies should ensure equal treatment in the tax system, including inheritance tax.
- 3) Caution should be exercised when it comes to taxing assets, especially for companies that make an important contribution to society.
Greater taxation of passive assets, especially of land, is the much better way to a balanced tax system that not only ensures a fundamental fairness but also helps to raise economic potential.