Wealth tax in Germany
Since the 2021 federal election campaign, an old topic has been boiling up again: the possible reintroduction of the wealth tax in Germany. The wealth tax was an asset-related tax on net wealth. The taxpayer’s total assets were used as the basis of assessment, less debts. The legal basis of the property tax is the Property Tax Act. Individuals, corporations under private law, corporations, foundations and cooperatives are subject to tax.
In general, wealth tax is levied according to the world income principle. Assets located abroad are therefore also included in the taxation. By the way, you can find out how to optimize your taxes both at home and abroad here. The four asset classes used are agricultural and forestry holdings, business assets, real estate assets and other assets.
An 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.
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Our conclusion on wealth tax in Germany
As described, the reintroduction of the wealth tax would most likely be unconstitutional, as the tax burden could quickly exceed income and the tax burden would then exceed 100 percent. Germany competes with other tax systems in the globalized world.
Why should a wealthy private person entertain the idea of offering rental space in Germany for strangers and thereby be penalized by the state and incur losses? So moving to Switzerland with its great mountains and relaxed people would be a real option and buying a property in another country like Austria much more interesting.