Everyone, every business hates taxes, but there is one tax that the majority of Germans support: wealth tax. 67 percent of Germans are in favor of introducing a wealth tax. Anyone who has more than one million euros should, under certain circumstances, have to pay part of it every year. Below, we show what the advantages and disadvantages of wealth tax would be.
What is a wealth tax?
A wealth tax is a levy on the total value of personal assets, which can include cash, bank deposits, real estate, investments, and other forms of wealth. Unlike income tax, which is based on earnings, a wealth tax targets the net worth of individuals, i.e. their possessions minus all their debts. As with many other types of taxes, there would be an allowance that is not taxed. Every euro above that would be subject to a tax rate. The tax rate can either be flat, as with property tax, or progressive, as with income tax. Example: If there were a wealth tax with an allowance of one million euros and a flat tax rate of 1 percent, a person with a net worth of two million euros would have to pay 10,000 euros in taxes.
Wealth taxes have been implemented in various countries at different times. For instance, Spain imposes a wealth tax on individuals with assets exceeding a certain threshold, with rates varying by region. In contrast, Norway has a wealth tax that applies to the value of an individual’s net wealth above a certain limit, with rates up to 0.85%. Comparatively, France had a wealth tax until 2017, which was replaced by a real estate wealth tax focused solely on property assets. The aim of such taxes is to reduce inequality and generate revenue from those with significant financial resources, but they are often debated due to potential impacts on investment and economic behavior.
Since when has the wealth tax existed?
Taxes on private assets are old news. In ancient Greece, wealthy citizens were usually taxed in times of war. In times of peace, they often had to pay for public services such as shipbuilding or the organization of festivals. The ancient Egyptians also had a kind of luxury tax, and in Rome taxes were levied on wealthy people in times of war – almost all the time. This tradition also prevailed in medieval and modern states.
In Germany, the first wealth tax was introduced in 1893, which was amended several times up until 1923, but also remained in place through the Second World War. The young Federal Republic had no wealth tax for a few years, until it was reintroduced in 1952 and last amended in 1974. In theory, German wealth tax still exists today, but has not been levied since 1997. In 1995, the Federal Constitutional Court ruled that the calculation of the tax contradicted the Basic Law. The issue was that property ownership was included far less in wealth than cash or shares. Instead of adjusting the wealth tax, the then federal government made up of the CDU/CSU and FDP suspended the wealth tax.
How was the German wealth tax structured until 1997?
Because the wealth tax was never abolished, the wealth tax law still exists today. According to it, private individuals and companies would have to pay the tax if they have their place of residence or place of business in Germany. Foreigners and foreign companies would be subject to limited tax liability for the part of their assets that are located in Germany, with business assets being exempt from this. Completely tax-exempt are Deutsche Post, Postbank, Deutsche Telekom and other companies under federal control, as well as all federal and state banks, all institutions in the health and education sector, health insurance and pension insurance companies, political parties and associations, and many other groups that serve the public good.
The current wealth tax law only allows for small tax exemptions. Most recently, tax-exempt amounts were 120,000 D-Marks for singles and 240,000 D-Marks for married couples, plus a further 120,000 D-Marks for each child and 50,000 D-Marks for seniors over 60 and the severely disabled. Taking inflation since 1997 into account, those tax-exempt amounts would now be 100,000 euros for singles and each child, and around 200,000 euros for married couples. Seniors and the severely disabled would receive around 40,000 euros extra. Companies would only receive a tax exemption of around 17,000 euros.
The tax rates were 1 percent of taxable assets above the tax-free allowance for private individuals, 0.6 percent for companies and 0.5 percent for business assets as well as agriculture and forestry. The exact tax burden was not recalculated for each taxpayer every year, but only every three years. In between, there were only changes if either the tax office or the person/company concerned could demonstrate an important change in assets.
What are current concepts for a wealth tax in Germany?
Today’s concepts provide for much higher limits. In 2019, for example, the SPD presented a plan according to which assets of two million euros or more for singles and four million euros for married couples would be subject to a tax rate of 1 percent, although this party reserves the right to further increase the tax rate for higher assets. However, the maximum should be 2 percent. Exceptions should apply to business assets so that companies do not have to sell their assets to pay the tax.
The Left wants a wealth tax on assets of one million euros or more. The tax rate should initially be 1 percent per year, rising to 5 percent for assets of 50 million euros and 12 percent for assets of one billion euros or more. Business assets of up to five million euros should be tax-free in order not to endanger small and medium-sized businesses. However, companies should not be liable to pay tax, only their owners – that is, the owners of private companies and the shareholders of listed companies.
Like the SPD, the Green party wants a wealth tax on assets of two million euros or more, with a tax rate of 1 percent per year. Business assets are to be exempted to an unspecified extent, as are investments in companies. This should give company bosses an incentive to invest their private assets in expanding their companies. The Greens’ concept is the least specific of the three parties.
The Sahra Wagenknecht Alliance (BSW) also wants to introduce a wealth tax, but has not yet commented on the details. The major parties in Germany – CDU, CSU, FDP and AfD – reject the tax.
Important: For all supporters of wealth tax, the allowances only apply to net assets, i.e. after minus all debts. Savings for retirement provision are also excluded.
Who would have to pay wealth tax according to these concepts, and how much?
Let’s take a fictitious millionaire with a net worth of five million euros: With the SPD, the Greens and the Left Party, he would be taxed at one percent per year of the four million euros he has above the tax-free allowance of one million euros. That would be 40,000 euros per year or 3,333 euros per month. With the Left Party, a person with 100 million euros per year would have to pay five million euros, and a billionaire would have to pay 120 million euros.
Only very small groups of the population are affected by these proposals. It is difficult to say exactly how many, because the wealth of private individuals is not currently recorded statistically. According to estimates by Manager magazine, there were 226 billionaires in Germany at the end of 2023. The Global Wealth Report by the management consultancy firm BCG estimated the number of millionaires in Germany in 2023 at around 500,000. This means only 0.6 percent of the Germany’s population would be affected by a wealth tax.
What revenue would the state receive?
In the last year of the previous wealth tax, 1996, the state collected around 7.66 billion euros in today’s purchasing power. How much it would be today can also only be estimated approximately. Firstly, as said, it is not certain how many taxpayers there would be, and secondly, the exact tax exemption limits and tax rates are unknown. Based on historical data, German Institute for Economic Research (DIW) assumes that a wealth tax would generate between 0.2 and 0.5 percent of gross domestic product. Based on the GDP of 2023, the state would collect a total wealth tax of 8.2 to 20.6 billion euros per year. The SPD expects 10 to 20 billion euros for its concept, the Greens expect 15 to 20 billion. The Left’s concept would bring in the highest revenue at 90 to 130 billion euros.
The administrative costs would have to be deducted from this. After all, the wealth tax would have to be regularly collected on the assets of every individual and company in Germany. The current recalculation of the property tax shows the effort involved. The DIW last estimated the administrative costs in 2016 at a maximum of 8.2 percent of revenue. This would leave between 7.5 and 18.9 billion euros (SPD and Greens) and 82.6 and 119.3 billion euros (Left Party) as revenue. In all concepts, as with the current wealth tax, these revenues would benefit the federal states. The Left Party also wants municipalities to participate in this.
Wouldn’t rich people simply flee abroad to avoid a wealth tax?
The first way to avoid wealth tax in Germany would be to move your assets abroad. Rich people could buy real estate abroad, buy shares in foreign companies or simply set up bank accounts elsewhere. But that alone does not protect them from tax. As long as someone is registered in Germany or spends at least half the year here, they are subject to unlimited tax liability in this country – including on assets abroad. The only exception would be whether the assets abroad are already subject to wealth tax. In that case, double taxation agreements regulate which tax is to be applied. But even in the best case, this means that wealth tax still has to be paid somewhere.
The second option would be to move abroad completely. From a purely financial perspective, this is easy for rich people and some would certainly do it. The Left therefore proposes that tax liability should not be linked to place of residence but to citizenship. This is what the USA does, and in some parts of France too. How many rich people would flee Germany because they have to give up a small part of their assets every year is speculative anyway. In addition, company headquarters cannot be moved so easily. But yes, there is a risk of capital flight.
Doesn’t the wealth tax already affect families who own their own homes?
Real estate is the largest asset that most Germans will ever own in their lives. According to a study by the LBS, residential real estate accounts for 56 percent of the assets of private households. But: Even when real estate prices have risen sharply in recent years, single-family homes and condominiums worth one million euros or more are a rarity. According to the Federal Statistical Office, around three percent of homeowners valued their property at more than one million euros in 2018. However, most of these properties had not yet been paid off, so their net worth could well be below the threshold. Even fewer homeowners would reach the threshold of two million euros that the SPD and the Greens want to set – and if they do, they are often those who own several properties, not just their own home.
And: A pensioner who lives in a paid-off house worth 1.5 million euros, for example, is not poor. Even in the Left’s aggressive concept, the tax burden on that would only be 5,000 euros per year, or about 417 euros per month. Compared to the rent in such a house, that is only a fraction.
Does a wealth tax harm small and medium-sized businesses in Germany?
While homeowners rarely reach the threshold for wealth tax, companies do so quickly. An average farmer is already a millionaire if you add up land and plant ownership. Craft businesses also quickly accumulate large sums. This is why business associations such as family entrepreneurs and the Association of the Automotive Industry in particular are up in arms against a wealth tax. The IW Cologne also came to the conclusion in a 2021 evaluation that a wealth tax would be detrimental to business. In addition to the pure tax costs, companies would also have to pay high so-called compliance costs. These include the costs for tax consultants.
The parties that are in favor of a wealth tax are aware of these problems. The Greens therefore have the approach of exempting investments from the tax, while the Left does not want to tax companies directly, but only their owners. This would completely protect business assets. In addition, in any concept, companies could probably exempt their assets tied up in machines, offices and the like from tax, so that the substance of a company does not suffer under the tax. In any case, however, it would probably act like an additional corporate tax.
What are the arguments for a wealth tax?
The biggest argument of the proponents of a wealth tax is the inequality in the distribution of wealth in Germany. This in turn is closely linked to the fact that capital and labor are taxed differently. Even an employee with an average salary of 45,000 euros a year has to pay an average of 35 percent of this salary in taxes and social security. A study by the charity Oxfam, the Austrian Momentum Institute and the Tax Justice Network recently came to a conclusion that a middle-class family is taxed 43 percent, while multimillionaires only pay 29 percent and billionaires only pay 26 percent. This means that the gap between rich and poor is widening.
Proponents of a wealth tax therefore also add that this reality contradicts the principle of tax justice, according to which the tax burden should be based on the taxpayer’s ability to pay.
Who oppose a wealth tax?
Critics of the wealth tax cite the points already mentioned above, especially the taxation of companies and the competitive disadvantage resulting from wealth tax, when compared to foreign companies with a lower tax burden. They also fear that a wealth tax could endanger jobs or lead to rent increase because company and home owners will simply pass the burden on to tenants. In its study, the IW Cologne calculated that a one percent wealth tax for companies would have an effect equivalent to a tenfold increase in income taxes on profits. In addition, this tax would also have to be paid in times of crisis, i.e. when losses are incurred.
Which other countries have a wealth tax?
In Europe, Norway, Spain, Switzerland, France, Italy and the Netherlands tax the assets of their citizens. The exact structure varies considerably, however. Norway has a tax rate of 0.85 percent with an allowance of 160,000 euros for singles and 320,000 euros for couples. In Switzerland, the rules vary from canton to canton. Spain has a progressive tax rate of 0.2 to 2.5 percent with an allowance of around one million euros. Italy and France only tax real estate ownership. In the Netherlands, wealth tax is calculated as part of the income tax system, assessing a 32% income tax on the assumed return for assets (minus debts) above 57,000 euros (doubled if a tax partner shares the residence). Wealth taxes are also popular in South America, for example in Argentina, Colombia, Bolivia and Uruguay.
This tax could soon be introduced in even more countries. Brazilian Finance Minister Fernando Haddad will put it on the agenda for the upcoming G20 summit in Rio de Janeiro in November. France also supports the idea of a global minimum tax on wealth. It is not only in Germany that a majority supports it: in a recent Ipsos survey, 68 percent of respondents in 17 countries in the G20 group were in favor of a wealth tax – in Germany the figure was 67 percent.
