Press Release of February 11, 2015
A study by DIW Berlin presents a reform proposal – tax breaks could be restricted, tax burdens could be paid over longer periods – inheritance tax revenue would increase considerably
After the German Federal Constitutional Court determined in December 2014 that far-reaching exemptions to inheritance tax on corporate assets are partly unconstitutional, a new study by DIW Berlin suggests restricting tax exemptions for the heirs of corporate assets. “It is questionable whether such broad exemptions are required to prevent job losses at larger companies,” said the author of the study, DIW Berlin’s tax expert, Stefan Bach. Legislators ought to place ceilings on tax benefits and restrict them on operating assets. In return, tax payments on business transfers should be stretched out over longer periods, so the company successor can pay them off with current revenues. Tax authority claims could also be linked to the economic success of a business, and other liabilities could be given priority over the tax claim. According to calculations by DIW Berlin, inheritance tax reforms could increase tax revenues in the medium term from the current five billion euros to 13 billion euros per year if tax rates would remain the same. The calculations are based on estimates of annual corporate asset transfers of between 25 and 30 billion euros.
The German Institute for Economic Research (DIW Berlin) is one of the leading economic research institutions in Germany. Its core mandates are applied economic research and economic policy as well as provision of research infrastructure. As an independent non-profit institution, DIW Berlin is committed to serving the common good. The institute was founded in 1925 as Institut für Konjunkturforschung (Institute for economic cycle research). Since 1982, the Research Infrastructure SOEP (German Socio-Economic Panel Study), a long-term study, is affiliated to DIW Berlin. Thematically, the scientific work of the Institute is divided into nine Research Departments: Macroeconomics; Forecasting and Economic Policy; Development and Security; Energy, Transportation, Environment; Climate Policy; Firms and Markets; Competition and Consumers; Public Economics and Education and Family. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.
More Frequent Use of Existing Tax Concessions
The uptake of tax breaks for corporate asset transfers has risen sharply in recent years. According to inheritance tax statistics for 2009 to 2013, asset transfers totaling 278 billion euros - corporate assets of 105 billion euros – were transferred tax free, 90 billion euros of which were gifts. The associated loss of tax revenue for this period is estimated at 25 to 30 billion euros. Based on estimates of the wealth distribution, DIW Berlin forecasts that corporate assets totaling 25 to 30 billion euros will be transferred annually in the coming years. Since these assets can largely be transferred tax free under current regulations, this would entail tax losses of seven to eight billion euros per year, at current tax rates.
In particular, very large transfers consisting mainly of corporate assets enjoy company privileges. In 2012, a total of 33 billion euros were transferred in cases of inheritances or gifts worth more than 20 million euros, 95 percent of which were exempt from tax. However, in contrast to SMEs, such far-reaching tax exemptions on corporate assets worth millions are not necessary in order to secure jobs during corporate succession.
Tax Claims Could Be Deferred and Pegged to a Company’s Economic Success
As a result, a study by DIW Berlin proposes restricting allowances or exemptions on inheritance tax to between one and two million euros. Furthermore, they should be limited to required operating assets and be offset against other transferred assets or against the beneficiary’s assets. Tax-related liquidity and financing burdens on larger corporate assets could certainly be mitigated by extended deferral arrangements. Contrary to current regulations, these should be granted without conditions. The company successor can then pay off the tax burden from the company’s current income. Additionally, the company’s resistance to crises would be increased if the tax claim were linked to the commercial success of the company. “Hence, SMEs and large companies could remain family-owned, but, at the same time, tax benefits would no longer be disproportionate,” said Stefan Bach. “This would also eradicate the need for complicated and non-transparent means testing which would otherwise be required for a continuation of previous tax breaks for large companies, in accordance with the judgment by the Federal Constitutional Court.”
In addition to restricting corporate privileges, other benefits might also be abolished, such as tax exemptions for the family home or for donations. In return, personal allowances might be increased for inheritance tax, which are currently 500,000 euros for spouses or life partners, and 400,000 euros for children. DIW Berlin’s tax expert Stefan Bach also advocates, in the course of the upcoming reorganization of the federal-state financial relations, transferring inheritance tax revenues to central government and compensating the federal states for other tax revenue. Since inheritance tax is mainly incurred in the city-states of Berlin, Hamburg, and Bremen and prosperous regions of western Germany, it would be more widely redistributed as a result of fiscal equalization schemes. Therefore, there are few incentives for wealthy states to agree to inheritance tax reforms that burden high assets even more.