Berlin Carsten Linnemann has a few laughs on his side. “Thank you for the nice reception – despite the debates about our new basic program,” said the head of the CDU policy commission on Friday at an appearance in front of more than 300 well-known family entrepreneurs. The subsequent round of questions, which Linnemann asked at the “Day of the German Family Business” in Berlin’s Hotel Adlon, was less moody. The CDU Vice has to listen to a lot of criticism of the tax plans of the CDU.
The Union has ruled out any form of tax increases for many years, but now wants to ask the heirs of the company to pay a flat tax on inheritance tax. The CDU is striving for “a fair and simple inheritance tax” in order to create “justice”, according to the draft of the CDU basic programme, which the party is discussing this weekend.
In family businesses, these sentences lead to sheer horror: “For us family businesses, a red line has been crossed when the justified special rules for business assets, i.e. locations, machines, patents, are no longer applicable,” says Rainer Kirchdörfer, Chairman of the Family Business Foundation. Marie-Christine Ostermann, President of the Association of Family Entrepreneurs, complains: “The CDU is unsettling family entrepreneurs.” Astrid Hamker, President of the CDU Economic Council, even warns: “If inheritance tax worsens, many companies will turn their backs on Germany.”
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From the point of view of the family entrepreneurs, the CDU is stabbing them in the back. Although the flat tax proposal for the CDU is new, it has not failed. It is not only the SPD that wants to delete the exceptions. Liberal economists like Lars Feld, advisor to Finance Minister Christian Lindner (FDP), or Ifo boss Clemens Fuest are also in favor of a flat tax because they consider the current inheritance tax to be inefficient or unfair.
High inheritance – low inheritance tax
With the current generous exceptions for company heirs, politicians want to protect the economic power of German family businesses. But over the years, the exceptions have come under increasing criticism. According to a study by the SPD-affiliated Friedrich-Ebert-Foundation, up to 88 percent of women heirs do not have to pay inheritance tax. In the past twelve years, 3,630 people with inheritances of more than 20 million euros have received a total of 260 billion euros tax-free.
At the same time, the exceptions invite legal tax planning. For example, 43 billion euros in business assets were transferred to 220 children under the age of 14, who are unlikely to run the business at this age. According to the Ebert Foundation, for 2022 alone, the tax exemption rules are expected to result in reduced tax revenues of five billion euros.
The CDU now also considers this to be problematic. After 16 years in government, the Union wants to create a “new signature tune” with a new basic program, as Linnemann puts it. On Friday and Saturday, the CDU will discuss its results at a small party conference in Berlin. For CDU party leader Friedrich Merz, the new offer also includes a new tax policy – including inheritance tax reform.
The CDU chairman would like better framework conditions for Germany as a business location.
(Photo: IMAGO/Political Moments)
It is estimated that around 400 billion euros will be inherited in Germany every year in the future. Inheritance tax is due on 55 billion euros of this, so this wealth is above the applicable allowances. In order to achieve the current revenue of around ten billion euros with a flat tax with a uniform low tax rate, the assessment basis would have to increase by 80 percent from the current 55 billion euros, says Stefan Bach from the German Institute for Economic Research (DIW). “That should be possible by abolishing all tax privileges.”
The pitfalls of reform
However, this is where the first problem lies: Many business heirs would then pay more or even pay inheritance taxes at all. But because at the same time the tax rates for more distant relatives, which are higher today, fall with a flat rate. In order to increase the revenue to at least 15 billion euros, a standard tax rate would have to be 15 percent.
The second problem is the distributional effects. A flat tax would mean that close relatives such as spouses or children “pay more inheritance taxes, while more distant relatives, who now pay higher tax rates, and also large inheritances would be relieved,” said Bach. The same applies to companies: Small companies would be taxed more heavily than they are today and thus treated like large corporations, said the DIW economist.
Bach therefore proposes to continue linking the inheritance tax rates to the degree of relationship to a certain extent and to introduce tax rates of 10, 15 and 20 percent as well as tax exemptions at least for small and medium-sized companies.
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None of this reassures the family businesses. “A uniform tax rate sounds nice. However, experience teaches that a low tax rate will not stay low for long,” warns the head of the association, Kirchdörfer.
Fear of an inheritance tax election campaign
CDU Vice Linnemann defends himself against this criticism: The Union wants to create a uniform corporate tax law “with the aim that no company is burdened more in substance,” promises Linnemann. The Union only touched on the subject because party leader Merz expects today’s inheritance tax to be collected by the Federal Constitutional Court, he told the entrepreneurs. The party must be prepared for this.
Kirchdörfer considers this approach to be “completely wrong”. Why does the CDU have to initiate such a “highly dangerous discussion” in “anticipatory obedience”? The Union should rather wait until the constitutional court collects the inheritance taxes like the wealth tax once did and thus de facto bury them.
Linnemann fears that the next election campaign would then turn into an “inheritance tax election campaign”, which would play into the hands of the SPD and the Greens. Then, he argues, things might end up being much worse for the family businesses.
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