Wealth tax: Fuest sharply criticizes the Greens, the SPD and the Left - "In the end, everyone is poorer - including the state"

The Greens, the SPD and the Left are planning a return to the wealth tax.

In an interview, Ifo President Clemens Fuest explains what he thinks of it.

He warns of fatal consequences for those affected and the state.

Munich - Will we soon experience the renaissance of an obsolete model?

In 1995 the wealth tax was declared unconstitutional, in 1997 it was put on hold - but never completely abolished.

Now the Greens, the SPD and the Left are planning a comeback of the controversial tax: The draft programs for the federal election show that the Greens and the SPD want to tax their assets at one percent per year in future, the Left even at five percent.

Professor Clemens Fuest, head of the Munich Ifo Institute, castigates the plans of the Greens, the SPD and the Left.

In an interview, he warns against unequal standards and against emigration abroad.

In the event that the tax returns, he predicts a bonus deal for all parties.

Mr. Fuest, after the election the wealth tax could return.

The wealth tax has never been formally abolished; it has just not been levied since 1997.

In 1995 the Constitutional Court ruled that it was unconstitutional.

Of course, a government could make a new law and levy a wealth tax.

What exactly was the problem back then?

The court complained that the tax is not compatible with the principle of equality.

Because real estate in particular was valued according to unit values.

It could be that a property in Munich that was worth one million euros was only valued at 90,000 euros.

The owner did not have to pay any tax, while another with a million euros in the savings book had to pay full wealth tax.

If you want a wealth tax again, the valuation of real estate would have to be based more closely on the market value.

Who determines the value of real estate?

There is a law of valuation that can be used.

The law knows different methods of evaluation.

There is no observable market price for assets that are not constantly traded, such as real estate.

The valuation law therefore says: We try to get as close as possible to the value.

If you want a wealth tax that is constitutional, it is about an approximation of the market value.

There is one case of owner-occupied property in Munich.

A villa that is valued by the tax office at ten million euros.

If the Greens have their way, the owner would have to pay 80,000 euros every year with one percent wealth tax.

Yes.

Almost 6700 euros a month.

He has no income or cash in hand.

Then he has to sell or take out a mortgage.

That's not nice, of course - but that's how the law would be.

The constitution certainly does not protect the homeowner.

If someone has to sell their house in order to pay the tax, it is not necessarily unconstitutional.

Why should someone who has the ten million illiquid be protected?

That would be a tax-saving model.

Anyone with a lot of money buys a property and says: I can't pay because I'm not liquid.

But the house has been in the family for generations.

He just wants to live there.

Nevertheless, the law would presumably say that he is economically as productive as someone who has the sum in his or her account.

Anything else would also be unfair.

That sounds like a real dilemma.

It is precisely because of these problems that almost all countries have abolished wealth tax, and many even abolished inheritance tax.

In most cases, taxation is more likely to take effect when liquidity is available, i.e. income flows or sales are made.

These sizes are also easy to measure.

With a house, the argument begins with how much it is now worth.

Eight million?

Ten or twelve million?

That makes a huge difference when it comes to taxes.

That can be clarified in court, but the effect will remain: the man would have to go into debt or sell his house.

This leads to the fundamental question of how the tax system should be designed.

Your opinion?

A recognized benchmark is economic performance. We usually measure this in terms of income, not wealth. But now there is a demand from the SPD, the Greens and the Left to also tax assets. I am not in favor of this requirement. But if you levy it, you shouldn't puncture the wealth tax with exceptions. Otherwise it is quickly unconstitutional, but in any case unjust. We have already seen that with inheritance tax. In the past, if you have a business, if you continued to run the business, you could inherit virtually any amount tax-free. Today you can inherit business assets of up to around 26 million euros tax-free under certain conditions, and significantly more under special circumstances. When someone inherits a $ 26 million rental home,he pays full inheritance tax - up to 50 percent. What else is fair about that? The problem with taxes on the stock is that you can hardly make them fair and generate significant tax revenues without causing significant economic damage and curbing many taxpayers.

So a wealth tax has many hardships?

Taxes on inventory are always problematic.

There is no way to make a wealth tax fair and to keep the economic damage within narrow limits - except through very low tax rates.

For example, if the tax were 0.1 percent, the man in your example would have to pay 8,000 euros a year.

That is also uncomfortable, but maybe he could still do that.

But then the tax revenue is low and one wonders whether the evaluation effort is worth it.

Or you set very high allowances.

That cannot solve the problems, but it can defuse them.

However, that is not what the Greens, the Left or the SPD are proposing.

Because the higher the allowances, the lower the tax revenue.

In addition, owners of very high assets who are still affected can easily migrate abroad.

What is your bottom line?

A wealth tax would be counterproductive. Let's take a medium-sized entrepreneur with a company worth ten million euros - but shaken by the Corona crisis. That would also have to pay 80,000 euros per year. He probably doesn't have that. We also want him to invest in his company so that the jobs can be kept. Or take an investor who has used his allowance for his private house and is considering building a tenement house in Munich for ten million euros. If he gets a three percent return on rents, he is well served. He pays half of the three percent in income tax. Add another one percent wealth tax to that, he still has 0.5 percent return. The two taxes devour a good 80 percent of the income. Nobody invests anymore.A wealth tax would send a clear signal against investing in Germany.

So a capital flight abroad.

We are surrounded by countries that neither levy nor have abolished wealth taxes.

Only Norway, some cantons in Switzerland and some provinces in Spain still have them.

In Switzerland, however, the income tax is much lower and in Spain you can easily avoid the tax.

Then register your residence in Madrid.

There is no wealth tax and then you are rid of it.

Sweden and Denmark, countries with a large welfare state, have also abolished property and inheritance taxes.

Because the investors have said goodbye by the dozen.

That would hit us too.

People who are rich don't have to live where they work.

They are the first to go abroad.

And one more problem.

That would?

The tax authorities would have to dig deep into the private sphere, basically come to everyone's home and ask: Do you have antiques, paintings, jewelry?

Gold bars in the cellar?

Or classic cars in the garage?

That would all have to be raised.

And once you have recorded and measured people's wealth, it is very easy to increase the tax to two percent, for example.

That would be required in the next election campaign at the latest.

For that reason alone, many investors would leave the country.

Anyone who is really rich can do that without any problems.

What would a wealth tax bring in anyway?

A few years ago we presented a study on this, the result of which was that in the end it would lead to everyone being poorer - including the state, because less investment is being made and economic growth is falling.

There is income from wealth tax, but this is offset by lower taxes from other sources.

In your opinion, what would be a sensible alternative?

We have extreme loopholes in income tax.

Just one example: increases in the value of rented properties are tax-free after a holding period of ten years.

It doesn't have to be.

The new US President Joe Biden wants to tax the wealthy more, but for good reasons he is not thinking of a net wealth tax, but is concentrating on closing loopholes in income taxation.

A moderate increase in property tax would also be conceivable.

There are many options that are better than introducing a wealth tax.

Interview: Wolfgang Hauskrecht