Tax the Rich - Or What? Political Lessons of the Simulator

Things are swirling in political Berlin. Recently, there has been an increase in proposals from various political camps aimed at reducing inequality in Germany. For example, the Working Group of Young Socialists in the SPD (Jusos) recently called for a basic inheritance of 60,000 euros and the CDU expert commission demanded higher taxes for the rich. There is no doubt that wealth inequality is a key issue in the current socio-political debate. According to a study by the Bertelsmann Foundation, just 17 per cent of Germans believe that the current distribution of wealth is fair.

Only: until now, the debate has often lacked a solid data basis. The wealth simulator developed by the Forum New Economy together with a group of scientists led by Timm Bönke and Charlotte Bartels from DIW Berlin for the first time provides answers as to which instrument would contribute to a fairer distribution of wealth in Germany – and to what extent.

Last Friday, at the presentation of the simulator, we had BMWK chief economist Elga Bartsch, CDU politician Mario Czaja, former SPD leader Norbert Walter-Borjans and former Left Party MP Fabio de Masi discuss the distributional consequences that can be estimated on the basis of these new data and their political implications. The panel was chaired by Ellen Ehmke of the Robert Bosch Stiftung.

There was no disagreement among the politicians that a differentiated analysis of the distribution of wealth in Germany, one of the most unequal countries in the OECD, is urgently needed. This unequal distribution is exacerbated by the low level of social mobility in Germany. Germany is an inheritance society that is difficult to break into.

The results of the simulator suggest that the effects of the much-discussed wealth or inheritance tax of one or two per cent would make little difference to the wealth distribution. In addition to the large number of existing exemptions for large inheritances and assets, this is partly due to the fact that only 30 per cent of people in Germany receive any inheritance at all during their lifetime. Almost half the population has no assets at all. More would be done if people had access to money across the board, as is the case with instruments such as start-up capital or social dividends.

Commenting on the results, Norbert Walter-Borjans said he was convinced that a big impact could be made if people with little or no assets could be given a boost. This would not only create a degree of security, but also the opportunity to take more risks. He pointed out that the proposal for a basic inheritance should also be discussed in the light of the fact that 98.4% of inheritances are made in the West. This means that the unequal distribution is not only a question of top and bottom, but also of West and East – and of men and women. He also emphasised that it is important to discuss the conditions attached to the payment of a startup capital (in the simulator, the payment is earmarked, i.e. the money can only be used for education, starting a business or buying property, for example).

He also argued in favour of using the revenue from an inheritance tax to finance spending-oriented instruments such as the basic inheritance. Otherwise, social peace would not be sustainable in the long term.

To achieve this, the ever-increasing wealth must be included.

Mario Czaja, in the past one of the most prominent advocates of state start-up capital, spoke out in favour of managing the money for the instrument via a state fund that could generate a return. He also hoped that this would encourage more people to invest in capital investments with higher returns.

Fabio de Masi warned that a single instrument could never be sufficient to combat the entire problem of inequality.

While he agreed that the idea of a basic inheritance is compelling, he urged to take into account second-round and feedback effects, for example in the development of house prices. Therefore, a combination of instruments would be important. Progressive tax rates should continue to be considered, especially in the area of mega-wealth. Excessive concentration of wealth is not only an economic issue, but also has political implications, according to de Masi.

Elga Bartsch dismissed the question of whether there was any prospect of individual simulated measures being implemented in the current legislative period. While she agreed that the great inertia of distribution is worrying, the debt brake would impose limits on spending plans. The question of policy measures must therefore be broadened, argued Bartsch. The distribution of wealth is the end result of long-term, complex economic processes. According to Bartsch, these include increasing corporate concentration, inadequate incomes, a lack of opportunities to participate in the education system and a failure to improve pension provision. Initiatives such as raising the minimum wage, improving collective bargaining or reducing tax evasion could also help to improve distributive justice.

Note:

In the first phase of the simulator, each instrument was deliberately tested in isolation in order to quantify the magnitude of the effects on wealth distribution and the associated costs or revenues for the state. In the next stage of the project, an extended version is to be developed that will also allow second-round effects and the combination of individual measures to be tested. It would then also be possible, for example, to quantify the extent to which start-up capital could be financed through higher wealth or inheritance taxes.