Wealth tax slows down the economy

30 August 2021, Munich: A wealth tax is not suitable for financing measures to combat the crisis. As a tool for redistribution between the supposed winners and losers of the crisis, it is neither clever nor fair. This is the conclusion of a study conducted by Professor Clemens Fuest of the ifo Institute in Munich on behalf of the Foundation for Family Businesses.

A wealth tax in addition to the existing taxes would not only be a departure from the international norm. Business assets of companies with lower returns due to the crisis or sector-specific factors would also be excessively burdened – so much so that it would be tantamount to doubling income tax.

Wealth tax difficult to levy

The expected tax revenue could fall short of expectations. This is due to the fact that a wealth tax would be difficult to levy, but could, in some cases, also be avoided. If it were not possible to avoid the tax, investment, growth and employment in Germany would suffer – and other sources of taxation would be negatively affected.

According to Fuest, the redistribution between the supposed winners and losers of the crisis can already be implemented in a more growth-friendly and less risky way through income taxes. According to the available data, there is no evidence of increasing wealth inequality. On the contrary, it has remained constant since 2007.

Wealth inequality in Germany has remained constant at least since 2007. International comparisons show above-average wealth inequality in Germany. However, this does not take into account assets in the form of pension entitlements, which play a greater role in Germany than in other countries.

Less incentive to invest

“A wealth tax exacerbates the crisis and takes no account of companies’ liquidity situation. The tax reduces incentives for investment and capital formation. According to a simulated calculation, the gross domestic product after eight years with a wealth tax would be up to 6.2 per cent lower than without a wealth tax.”

“If such a tax were to be levied, it would incentivise an outflow of capital abroad. This would particularly affect the solidity of family businesses, which often have a high equity ratio”, says Professor Rainer Kirchdörfer, Chairman of the Foundation for Family Businesses.

Wealth inequality has not increased

The study also refutes the theory that wealth in Germany is increasingly unequally distributed. “According to the available data, wealth inequality has remained constant since 2007. Relative inequality is often overstated in international comparisons if assets in the form of pension entitlements are not included in the calculation. This is because it plays a greater role in Germany than in other countries”, says Fuest.

In this respect, international comparisons exaggerate the relative inequality of German wealth distribution. Taking this broader concept of wealth into account means, for example, that the Gini coefficient of wealth distribution falls by 21 per cent in the USA, but by 33 per cent in Germany.

Abolished almost everywhere abroad

Net wealth taxes have traditionally played a minor role in existing tax systems, and in recent decades most countries have completely abolished net wealth taxes. People occasionally point out that wealth-related taxes in other countries contribute more to tax revenue than in Germany. However, this is not due to net wealth taxes, but primarily to property taxes, which account for 3.2 per cent of tax revenue on average in the OECD, but only 1.1 per cent in Germany.

Teaser picture: Prof. Clemens Fuest © Stiftung Familienunternehmen / Thorsten Jochim