The older ones will perhaps still remember: On February 27, 1991, the “Bild” newspaper accused Chancellor Helmut Kohl (CDU) of “tax lies” and called him a “fall over”.
The day before, the government he led had, contrary to its election promises, decided on comprehensive increases in taxes and duties to finance German participation in the Second Gulf War, the liberation of Kuwait. The contribution to unemployment insurance was increased significantly, the solidarity surcharge was introduced and the petroleum and insurance tax increased.
A good three decades later, FDP leader Christian Lindner is threatened with a fate similar to that of Chancellor Kohl. The FDP was able to ensure that tax increases did not appear in the coalition agreement. Recently, Lindner was even able to launch a smaller relief package for citizens to compensate for the high energy prices.
However, with Russia’s attack on Ukraine and the NATO reactions that became necessary as a result, all of the federal government’s financial planning has become waste. On the one hand, Germany’s energy supply must be adapted to the new geostrategic conditions at top speed – at any price.
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National stocks of gas, oil and coal need to be built or increased, and distribution infrastructure needs to be rebuilt. At the same time, it is important to adapt the transfer payments, at least for those in need, to the significantly higher energy prices, which will probably continue to rise for some time to come.
On the other hand, Chancellor Olaf Scholz (SPD) announced – long overdue but still surprising – that he intends to spend more money on defense in the long term. In addition to setting up a special fund, i.e. taking on new debt for a specific purpose, this means that more money should flow into the defense budget every year.
The federal government needs a lot of money quickly
In addition, Europe and thus Germany face high costs for the care of refugees from the Ukraine. In addition, Europe must finance the arms deliveries to Ukraine and later help to rebuild the bombed-out country – regardless of the outcome of the war. This makes it clear that the federal government needs a lot of additional money quickly.
Without a doubt, the best way would be to generate additional income through growth and thus more tax and contribution income. However, this is made more difficult by the rapid increase in energy prices, which are having a significant impact on economic recovery.
In addition, from the end of this legislative period, a strong surge in aging will set in, dampening economic momentum. German politics is not only confronted with an acute economic downturn, but also with a structural growth problem in the near future.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
New borrowing is a legitimate means when unforeseeable events require rapid government action, as was the case with the outbreak of the corona pandemic. However, new debt is not a sustainable instrument for financing permanently increasing expenditure on national defence, climate protection and aging.
Really relevant shifts in the budget are also not possible, since the largest items – in particular the subsidies to social security funds – are actually not disposable. As a result, the only option left is tax and levy increases. Finance Minister Lindner knows that too.
Need to look at badly done taxes
Value added tax is considered to be the most harmless tax for the economy as a whole, as it hardly distorts economic decisions and also does not burden exports. However, in view of its regressive effect and above all in view of the very high inflation, an increase in this tax would currently be a politically unconveyable signal.
It is therefore time to take a look at a tax that is good in terms of finance and distribution policy, but is rarely poorly made in Germany: the inheritance and gift tax. With a volume of almost ten billion euros, their share of the total volume is barely more than one percent.
It is undisputed that every taxpayer experiences a relevant increase in net worth through a gift or inheritance, which increases their ability to pay. This growth is all the higher, the greater the newly acquired wealth.
However, the amount of inheritance tax does not primarily depend on the value of the transferred assets, but rather on the relationship between the testator and the heirs and the type of assets. If you bequeath more than 20,000 euros to your brother or sister, you have to pay 15 percent tax on it.
If, on the other hand, a property in a middle location is transferred to the spouse, this is often tax-free. And even if business assets in the tens of millions are transferred, the tax authorities usually get nothing. Although the German inheritance tax law knows tax rates of up to 50 percent, nobody actually has to pay them due to generous special rules and exemptions.
The DIW estimates that assets worth around 400 billion euros are inherited every year. With exceptions kept to a minimum and a broad tax base, significant revenue could be generated from a low effective tax rate. An effective tax rate of just ten percent would generate additional revenue for the state of 30 billion euros.
Avoid inheritance tax
In view of the fact that significant parts of the FDP are likely to object to such plans, a look at the “Freiburg Theses” of this party is recommended. This basic program of the FDP, passed on October 27, 1971, states that “the previous inheritance tax drags on an outdated system that impairs our economic and social order and their free development, above all by hindering the desired accumulation of wealth among broad sections of the population “.
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Furthermore, this tax favors “a socially harmful accumulation of large fortunes and the associated rights of disposal”. The inheritance tax rate is “highly anti-social” because of numerous design options. He favored a small group of people and the acquirers of large fortunes.
At that time, the FDP called for the inheritance tax to be replaced by an estate tax. Small assets should remain tax-free, larger estates should be taxed at 22 percent and very high at 75 percent. Basically, there is little to add to the arguments from back then, even if the tax rates are certainly too high.
According to the Basic Law, the federal states are now entitled to higher inheritance tax revenue. Ultimately, however, this is a question of vertical financial equalization.
In an acute crisis situation, this should be changed, for example by the states ceding a share of the sales tax to the federal government – or even better, waiving inheritance tax altogether. Because redistribution should primarily be the task of the central government. Where there is a will, there will also be a way.
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