Wealth Tax in Germany: Old Wine in New Bottles?

In principle, the tax rate was 1% for individuals and 0.6% for corporations. The exemption amounts for wealth tax were DM 120,000 for individuals and DM 240,000 for joint taxpayers. For each child living in the household, another 120,000 could be added.

This annual wealth tax was levied from 1923 to 1996. On the one hand, the tax was levied on a nationwide basis, but the revenue from the wealth tax was then allocated to the states. Over the decades, the wealth tax has had a moderate but noticeable impact on the public budgets of the Länder. During the 1950s and 1960s, revenue was about 0.4 percent of GDP and then declined to 0.3 percent in the 1980s and 0.2 percent in the 1990s. Today, the wealth tax would amount to ten billion euros annually

The reason for the decline in property tax revenue was the tax valuation of real estate, which has not been updated since the main assessment in 1964. Instead, the so-called standard values applied. Due to the associated preferential treatment of real property, the Federal Constitutional Court finally declared the procedure unconstitutional in 1995. The majority in the Bundestag wanted to abolish the wealth tax and opposed a new regulation of property valuation for the wealth tax. Therefore, the wealth tax has not been levied since 1997.

However, the Wealth Tax Act has endured to this day. For example, there are repeated discussions about reviving the wealth tax. This can be observed in almost every election campaign. Of course also again for this year’s federal election, in order to score points with the respective party clientele.

The biggest critic of the wealth tax is the Ifo Institute. In a study published on Monday, it comes to a scathing verdict: the wealth tax would cause great economic damage and bring the state less revenue than hoped. According to a simulation calculation, “after eight years with wealth tax, gross domestic product would be up to 6.2 percent lower than without wealth tax,” warns Ifo head Clemens Fuest.

“Because the tax will be costly to collect and partly circumvent, the revenue from this tax could fall far short of expectations,” Fuest speculates. If circumvention were not possible, investment, growth and employment in Germany would be curbed. Overall, the tax reduces incentives to invest and build up capital.