ReLive Short Cut: Inheritance tax before the ruling—too much, too little, too unfair?

Are large inheritances taxed too little or too much in Germany? For some, this question immediately raises fears about their grandparents’ house. Others argue that large fortunes have hardly been taxed at all to date. This debate will reignite when the Federal Constitutional Court rules on whether the current practice is acceptable.     

We discussed the origins, purpose, and effects of inheritance tax in our next New Economy Short Cut:  

Inheritance tax before the ruling—too much, too little, too unfair?   

Thomas Fricke began by providing an overview of the current inheritance tax structure. He explained that the Federal Constitutional Court had ruled it unconstitutional three times since 1995. In its latest ruling, in 2014, the court had criticised the exemptions for business assets. However, the following 2016 reform did not adequately address these criticisms, prompting another constitutional complaint to be filed. The corresponding ruling from the Federal Constitutional Court is now expected this year.

Martyna Linartas added to these remarks by providing more context on the history and logic of inheritance tax. She emphasised that the share of inheritances and gifts in total wealth has risen steadily since 1970 and now exceeds 50 per cent. Given this growing importance of inheritances, the family one is born into is becoming increasingly consequential.

“Statistically speaking, we are already more of an inheritance society than one based on merit”
Martyna Linartas

Linartas also noted that inheritance plays an even more significant role in the wealth of German billionaires than in that of the average population. Nowhere else does inheritance account for such a large proportion of a billionaire’s wealth as it does in Germany. Linartas emphasised that inheritances were much more heavily regulated in the past. In 1920, for instance, the maximum inheritance tax rate was 90 per cent. Although inheritance tax is still progressive, there are too many loopholes today, particularly for the super-rich. She noted that these privileges have cost over 90 billion euros since 2009.

A more in-depth analysis of Bundestag debates also shows that the weakening of inheritance tax was accompanied by a shift in the political narrative. While arguments for and against inheritance tax reforms were evenly balanced in 1919, since 1995, nearly 90 per cent of arguments put forward in the Bundestag have been negative.

Stefan Bach then outlined various proposals for reforming inheritance tax. In light of the ageing population and the resulting increase in gifts, he first emphasised the growing importance of inheritances. He then agreed with Linartas that the annual tax losses due to loopholes were considerable. Bach then presented various simulations by the DIW. First, he showed that suspending all existing tax advantages, particularly those relating to business transfers, could generate additional annual revenue of up to eight billion euros. By contrast, the ‘flat tax’ of around 10 per cent, which is often called for by business associations, would generate two to three billion euros less than the current inheritance tax structure. Finally, Bach advocated a moderate solution. According to this, the benefits for business transfers should be reduced while higher lifetime allowances should be introduced simultaneously. This could generate more than 2.4 billion euros in additional revenue annually.