Reintroducing the Wealth Tax at any Cost?

One of the issues that will figure prominently in the upcoming German parliamentary election is whether to increase taxes on wealth. For the most part, Germany currently taxes wealth by means of an inheritance tax. Now the Social Democrats and the Green Party are calling for a one per cent annual tax on Germans whose net wealth exceeds Euro two million. Such a tax, known as a "net wealth tax",

existed in Germany before, but in 1995 the German Constitutional Court ruled it unconstitutional for taxing different kinds of assets in an inequitable manner.

Advocates of the wealth tax have used two arguments to support their proposal. First, Germany’s national debt has swollen in efforts to rescue banks during the economic crisis. It’s only fair to ask the wealthy to do their part in reducing state debt, especially since private bank creditors have been insulated from losses. Second, they argue that a wealth tax is needed to help reduce an unacceptably high level of income inequality and strengthen an underfinanced welfare state.

What should we make of these arguments? At first glance, the idea that Germany’s financial problems can be solved by increasing the tax burden on a small group of wealthy individuals - estimates put the number at 150,000 people - seems attractive, at least for the vast majority of the population exempted from the tax. A closer look, however, shows that the wealth tax will cause new forms of injustice and inflict considerable economic damage that impacts us all. Those who want more redistribution would do better to increase progressive income taxation or use the inheritance tax more effectively.

The main problem with the wealth tax is that it puts investment and jobs at risk. A current ZEW study by Christoph Spengel and Lisa Evers examines the tax burden on corporations that results from existing taxes combined with the proposed wealth tax. According to the study, a one per cent wealth tax with a EUR 2 million tax allowance would increase the effective corporate income tax burden by 14 to 20 per cent depending on business type. In addition, since the wealth tax would have to be paid even when companies record an annual loss, it would exacerbate economic crises. Even Peer Steinbrück, the SPD candidate for Bundeskanzler, admits that company assets must be protected. But for most wealthy taxpayers, the majority of their wealth is tied up in business.

Of course, some taxpayers do have very high private financial assets. But they can easily circumvent a wealth tax by moving abroad. Ultimately, a wealth tax only affects those who have real estate assets, which can’t move with them. Thus, the burden of a wealth tax would by no means be fairly distributed. What’s more, administrative costs would amount to up to 50 per cent of revenues from the wealth tax, as taxpayer wealth would have to be assessed anew each year.

For these reasons, almost all industrialised countries have eliminated their net wealth taxes. Often it is claimed that asset-related taxes are lower in Germany than in other countries. But this is mainly because property taxes are higher abroad. And this is one area where Germany’s politicians could consider raising taxes. But the reintroduction of the wealth tax would represent an economic Sonderweg that would keep domestic and foreign investors away from Germany. The same applies to a single retroactive levy, as most would be wary of government assurances that it is a one-time deal. Any party that runs with a wealth tax on its election platform could regret it in case of a win. The price that Germany would pay for reintroducing the tax is too high.