Why a wealth tax is likely to come but isn’t likely to pay off

Which of the following countries is the poorest in terms of mean wealth per adult?

  • Australia, 
  • Singapore, 
  • Austria,
  • Switzerland, 
  • Germany

It’s Germany. It is number 21 in the global ranking – Switzerland (1), Australia (4), Singapore (8), Austria 14).

That is interesting as Germany is often called economically one of the most powerful nations. But that is true as well. The same list above ranked by total wealth, Germany is number 4 – USA (1), China (2), Japan (3).

The reason for the difference? The size of the country. Compared to countries like Switzerland, Austria or Australia, Germany is a large country in terms of population. 

But no matter how you look at it: Germany is quite a wealthy country. Therefore, it is no wonder that here is – as in many countries – a current debate about the reinvention of a wealth tax

The wealth tax is claimed to be an effective instrument for fostering equity within society. Germany’s co-governing Social Democrats (SPD) just released a draft of their electoral programme. The party endorses the introduction of a wealth tax and uses extra revenues to boost public infrastructure investments.

Two more parties in the German parliament call for a wealth tax: the Greens and the left-wing party Die Linke. 

If these three parties have a majority in the next legislature, they will introduce a wealth tax, presumably.

The german wealth tax has been suspended since 1995. At that time, the Federal Constitutional Court of Germany in Karlsruhe found that wealth taxes “would need to be confiscatory in order to bring about any real redistribution”. 

Measuring the value of different types of wealth is one of the problems of the wealth tax. Cash, equity, firm and government bonds, real estate holdings, tangible assets such as yachts and art collections – wealth has many faces. 

Another problem: The more uniform a wealth tax is on all assets, the more negative the effects are on economic activity. A tax burden on corporate equity can destroy companies if they can’t pay tax loads from their current revenues. An annually remitted wealth tax often raises liquidity problems.

Because of the negative effects, a wealth tax wouldn’t pay off. “The introduction of a wealth tax – no matter what form it takes – would have a noticeable adverse effect on economic activity in German”, is said in the article “The Economic Effects of a Wealth Tax in Germany” by economists from the Ifo Institute – Leibniz Institute for Economic Research at the University of Munich.  Gross domestic product (GDP), for example, would probably shrink. “The overall fiscal effect of introducing a wealth tax is expected to be negative, generating a loss of around 24 billion to 31 billion euros annually”, the economists wrote.

That might be why by 2018, only four of twelve European countries (France, Norway, Spain, and Switzerland) still have an annual wealth tax levied in 1990.

But the current trend is heading in the other direction. Many countries discuss a wealth tax, for example, the UK and the USA. Why? Because a wealth tax ist popular. As in Germany, a majority supports the introduction of a wealth tax.

Therefore, it is likely that such a tax will be introduced in this country in the years to come. That can foster equity within society (the share of aggregated wealth in Germany held by the wealthiest decile accounts for over 60% of total net private wealth); however, probably there will be less wealth to distribute.

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