Is wealth tax on the verge of a revival?

Wealth tax unconstitutional in the past

The wealth tax in Germany has a long history. It was introduced for the first time in 1893 with the Prussian Supplementary Tax Act. The German Reich levied capital duties with the military contribution (1913) and the war tax (1918). In order to pay off government debt after the First World War, rich people had to pay a one-time wealth tax from 1919. Starting at 5,000 marks, this amounted to ten percent and increased with increasing wealth. Starting at seven million marks, 65 percent should be paid.

In 1922, a new wealth tax law was announced with regular contributions. At that time, taxable assets included real estate and real estate as well as precious metals, pearls, precious stones, jewelry and art collections. But the concept failed because many wealthy people brought their capital abroad or delayed payments.

In 1952, the German Bundestag passed the Wealth Tax Act, which is still formally in force today. From 1978, the tax rate for natural persons was 0.5 percent and for legal entities 0.7 percent (0.6 percent from 1984). In the new federal states, wealth tax was not collected after reunification. In 1995, the wealth tax rate for natural persons rose from 0.5 to 1.0 percent.

In 1997, the wealth tax was abolished after the Federal Constitutional Court declared it unconstitutional due to the violation of the principle of equality. Put simply, the judges ruled that the state may not take away more than half of their income from citizens. With high incomes, however, income tax alone created such a burden. Another argument was that real estate was preferred over cash. Since the value of real estate in West Germany was determined according to a table from 1964 and in East Germany according to one from 1935, real estate was recently included in wealth taxes with an average of only ten percent of the actual market values. Monetary assets, on the other hand, were taxed in real terms. For this reason, in 1995, the Federal Constitutional Court ruled: “The tax base must be drawn up properly and reflect its values in a realistic manner.”

Because of the complicated new valuation process, the government finally waived the wealth tax altogether in 1997, but in theory this still applies today.

Since then, proposals for the recovery of wealth tax have been discussed again and again, especially as the financial assets of private households in Germany are steadily increasing — partly due to the consumption backlog caused by the corona pandemic. At the end of 2020, that Financial assets of private households of just under seven trillion euros achieved a new record. This is the twelfth time in a row that Germans' wealth is increasing, while the state budget is writing deficits due to the pandemic.

Structure of wealth tax 2.0

In order to provide the state with more income and pay off the significantly increased debts due to the corona crisis, Some parties are in favour Wealth tax is currently making a comeback.

The Greens, the SPD and the Left are in favour of such a tax and also provide specific figures. The net worth limit for the Greens is over two million euros, for the left above one million euros. Everyone wants to tax their assets at one percent per year, but make exceptions for business assets. For the left, an increase to five percent is planned for assets of 50 million euros or more.

The FDP, CDU and AfD disagree. For the FDP, a wealth tax would be an “obstacle in combating the economic consequences of the corona pandemic.” The CDU/CSU sees a burden on business assets and thus jobs for all at risk.

A general difficulty is the valuation of assets. In the case of stocks or savings money, an assessment is relatively easy, whereas the value of land, business assets or even works of art would have to be determined regularly and allows great leeway.

The CDU and the FDP still share the approach of real estate taxation, which, however, should already be largely compensated for by the reformed property tax: “The global trend is that The easiest way to value assets to tax is, namely real estate — and other assets, not at all or only very low and then taxed on a lump sum basis.”

The introduction of a new wealth tax would redistribute money “more fairly,” argue advocates. However, skeptics fear that the rich could emigrate, transfer their wealth to tax havens and companies could be relocated abroad, which could even have negative effects on the state budget. If, on the other hand, assets continue to be invested or invested, the federal government receives inflows from the assets via capital gains tax.

Wealth tax in the EU: tested and abolished again

Even by international standards, wealth tax does not guarantee full state coffers: The majority of EU and OECD countries has never raised or abolished such a tax again. A look at France shows that wealth tax can even be a loss-making transaction. The Socialists introduced the “Impôt de Solidarité sur la Fortune” (ISF) in 1981, which affected all private individuals with assets of more than 1.3 million euros (around 340,000 French people). As a result, many of them decided to leave the country. It is estimated that up to seven billion euros have flowed abroad in this way every year — with annual tax revenues of four to five billion euros. According to economists, the tax cost France 0.2 percent of economic growth per year until its abolition in 2018. With the transformation into a pure real estate tax Above a limit of 1.3 million euros of global real estate assets, France said goodbye to the unprofitable ISF in 2018.

In most countries, however, asset-related taxes are levied, such as property tax on real estate value (before deduction of debts), real estate transfer tax on sales of land, or inheritance tax on inheritances and gifts between people. According to experts, asset-related taxes (in particular inheritance tax and property tax), which are tailored to the particularly rich, could yield around 15 billion euros annually without causing major economic disadvantages for Germany due to capital flight.

Tangible assets as asset protection

It is not yet clear whether and to what extent the new federal government will introduce a wealth tax. However, investors should ideally hedge themselves now and invest in alternative assets that may not be affected by wealth tax. These include, for example, tokenized tangible assets such as real estate, classic cars, fine wine, art and diamonds (security tokens). This is the digitized representation of an (asset) value, including the rights and obligations contained in this value and its transferability made possible as a result.

Security tokens are stored in German tax law They do not represent private assets, but are subject to taxation as income from capital assets as equity or debt securities, depending on their structure. For tax purposes, security tokens are therefore treated in a similar way to shares whose distributions and capital gains are subject to a flat rate withholding tax of 25 percent.