Inheritances: Abolish Tax Privileges, Reduce Tax Rates

Press Release of February 1, 2016

DIW Berlin experts estimate annual value of inheritances and gifts to be between 200 and 300 billion euros – high levels of inequality due to heavy concentration of wealth and largely tax-free transfers of big businesses – experts recommend reducing tax privileges and imposing limited tax rates for business transfers

In 2009, tax privileges for transfers of businesses were expanded; the Federal Constitutional Court then put a stop to the expansion. Now the grand coalition is discussing an inheritance tax reform that would further limit tax privileges in the transferring of big businesses.

German Institute for Economic Research (DIW Berlin)

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 advice 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. The institute has been headquartered in Berlin since its founding. As a member of the Leibniz Society, DIW Berlin is predominantly publicly funded.

In a new study, DIW Berlin economists Stefan Bach and Andreas Thiemann simulate the potential inheritance volume for the period between 2011 and 2020, estimate the potential donation volume, and analyze the effects of a tax that eliminates all tax privileges.

“With its strategy of ‘minimally invasive reform,’ the grand coalition has gotten stuck in a web of conflicting goals,” explained tax expert Bach of the planned inheritance tax reform. The inheritance model simulated by the DIW Berlin experts is simple: Abolish all tax privileges and impose a limited tax on all inheritances and gifts exceeding a high personal allowance, both of which would lead to tax revenue increases in the long term.

Heavy concentration of wealth leads to inequality

According to Bach and Thiemann, approximately 200 to 300 billion euros will be inherited or gifted annually over the next few years. Since Germany’s wealth is highly concentrated, the transfers are expected to present a similarly unequal distribution. Approximately only half of the transfers are below 50,000 euros, while the 1.5 percent of cases with transfers in excess of 500,000 euros account for one third of the total transfer volume, and the 0.08 percent of cases with transfers in excess of five million euros account for 14 percent of the transfer volume.

Bach und Thiemann estimate that of the total annual transfer volume, business transfers will account for 30 to 40 billion euros for the foreseeable future. Under the current law, these transfers will be largely tax exempt—and the Federal Government’s proposed legislation will not change this fact very much, according to Bach. Because these are businesses, the associated inheritances and gifts are even more heavily concentrated than they are in the case of personal asset transfers: about half of all business transfers comprise inheritances and gifts over five million euros.

Inheritance tax reform in a deadlock

Bach and Thiemann recommend heavily reducing the tax privileges and imposing limited tax rates—say, 15 percent—on the transfer of businesses. It should take a few years, however, before such a basic inheritance tax reform starts having a strong effect, because due to anticipatory effects, asset holders have already started transferring a significant proportion of wealth to the next generation tax-free.

If in a few years the inheritance tax were to fall through for the fourth time in the Federal Constitutional Court, a moderately progressive wealth tax would need to be imposed that has a strong effect not only on the lower upper class, but also on the very rich households. Such a plan could include increases in existing corporate and capital income taxes, or a reintroduction of the wealth tax, for example.