High-earners in Europe more likely to inherit wealth

Press Release of May 3, 2016

DIW study: in several European countries prior to 2010, between 27 and 40 percent of households received inheritances or gifts – German tax policy regarding inheritances and gifts riddled with exceptions

High-income individuals are more likely to inherit wealth than are low-income individuals; they also receive significantly larger amounts. Those from privileged social backgrounds are also able to amass more wealth overall, since they have access to higher-paying jobs. This is the result of a new study conducted by the German Institute for Economic Research (DIW Berlin) and commissioned by the Hans-Böckler Foundation. The study appears in the DIW Economic Bulletin 17/2016.

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.

“Individuals from wealthy backgrounds have higher incomes on average—and moreover, there’s a higher likelihood that they can look forward to receiving inheritances and gifts,” explained DIW economists Christian Westermeier and Markus Grabka along with their colleague Anita Tiefensee of the Hertie School of Governance.

For their study, the three economists examined the role that inheritances and gifts play in households’ asset portfolios and in the unequal distribution of wealth in the euro area. Due to variances in data quality and the absence of comparable data for all member states, the study’s focus is limited to eight countries: Greece, Spain, Portugal, Cyprus, France, Austria, Belgium, and West Germany (East Germany is omitted due to difficulties valuating pre-unification inheritances and gifts).

Education, income, and social status are key determinants

In all countries under examination up until 2010, between 27 and 40 percent of the analyzed households received at least one inheritance or gift—that is, a wealth transfer to the household from an external source. The sum of all inheritances and gifts accounted for one-third of West German current households’ net assets, which is the highest share of all countries under observation. Based only on the recipient household, wealth transfers account for more than 50 percent of their current net worth in West Germany. The study also reveals that—at least in Austria, Belgium, France, and West Germany—as income increases, so does the probability of having received such a transfer.

With regard to West Germany and Austria specifically, the study’s authors explain that the “top-earning 20 percent of all households were twice as likely to have received an inheritance or gift that were the bottom 20 percent.” The authors believe this is due to differences in educational and economic mobility between the two groups. That means that an individual’s income, social status, and level of education rarely differs from those of their parents—wealth is preserved, inherited, or gifted, which maintains the strong asset positions over the course of generations. However, in the Mediterranean countries under examination—Greece, Portugal, Spain, and Cyprus—there are fewer differences among all income groups regarding the frequency of transfers. Nevertheless, all countries surveyed reported that high-income households inherited larger amounts than did low-income households.

German tax policy: too many exemptions

Westermeier, Grabka, and Tiefensee argue that Germany’s tax policy has given favorable treatment to large fortunes and high incomes over the past two decades. The indefinite suspension of the wealth tax, the privileging of corporate and capital income when determining taxation and the low maximum tax rates on high income levels have all contributed to the gap between rich and poor. Current tax policy is full of loopholes for inheritances and gifts, which is unlikely to counteract this situation.

“Policy should be shaped to create equal opportunities, and social background should be less of a determinant in economic status,” says Westermeier. “Additional revenue from asset-related taxation could be used expressly to facilitate educational and income mobility.”

The present study is based on data from the Household Finance and Consumption Survey (HFCS)—a representative survey of individuals living in private households that was initially conducted by the European Central Bank (ECB) and the central banks of the euro area.