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The economic effects of a wealth tax in Germany

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ifo DICE Re port 2 / 2018 June Volume 16
Clemens Fuest, Florian Neumeier,
Michael Stimmelmayr and
Daniel Stöhlker
The Economic Effects of
a Wealth Tax in Germany
In recent years, the calls for a (re-)introduction of a
wealth tax in Germany have become louder for at least
two reasons.1 Firstly, the proponents of a wealth tax
emphasise that the share of public revenues from
wealth-related taxes collected in Germany is far below
the OECD average and that a net wealth tax could cre-
ate additional fiscal leeway. Secondly, wealth taxes are
oen claimed to be an eective instrument for foster-
ing equity wit hin societies. L ately, this view has received
prominent support from French economist Thomas
Piketty, who has turned out to be a fierce opponent to
abolishing the wealth tax in France.
In the context o f a recent policy repor t prepared on
behalf of the German Federal Ministry for Economic
Aairs and Ene rgy (BMWi), we ass ess the economic and
fiscal consequences of the introduction of a wealth tax
in Germany. This study represents a shortened version
of that report. Special emphasis is placed on the short
and long-term impact of a wealth tax on important
macroeconomic aggregates, such as Gross Domestic
Product (GDP), private inve stment, employment as w ell
as several other key economic variables. Moreover, we
also est imate the expected revenu es from a wealth tax,
as well as the eect a wealth tax would have on reve-
nues from other taxes, especially the consumption and
income tax. Our computations are based on a dynamic
computable general equilibrium (CGE) model that
depicts the German economy and tax system in detail.
In the course of our analysis, we compare t he economic
and fiscal eects of dierent wealth tax concepts and
wealth tax rates.
DISTRIBUTION OF PRIVATE WEALTH IN GERMANY
Despite being only poorly documented empirically, the
distribution of wealth and income in Germany and its
development has taken centre stage in the discussions
over wealth taxatio n. The argument has been trig gered
by recent studies from the International Monetary Fund
(IMF) (Ostry et al. 2014) as well as the Organisation for
Economic Co-operation and Development (OECD) (Cin-
gano 2014) who claim to have found a negative link
between economic inequality and economic growth
– a result that we show to be awed for advanced
economies.
1 In German y, a wealth t ax was in eect unti l 1996 when the fed eral consti-
tutiona l court declare d it to be unconstitu tional becaus e of the dierence s in
the valua tion practi ces of real est ate propert y compared to ot her asset s.
Data from the German Panel on Household Finances
(PHF) – a survey based on 3,500 households that was
conducted in 2014 – provided by the German Bundes-
bank oer a snapshot of wealth distribution in Ger-
many. We summarise several types of wealth that
would probably be subject to a wealth tax, including
cash, equity, firm and government bonds, real estate
holdings and tang ible assets such as yach ts and art col-
lections, before subtracting the stock of debt in order
to obtain a figur e for current net househ old wealth – the
relevant tax bas e for a wealth tax. Average and total n et
wealth for each net-wealth-decile is depicted in Figure
1. A mere glance at the Figure suggests that private
wealth is highly unequally distributed, with the wealth-
iest individ uals holding a significantly la rger amount on
average than less wealthy households. For example,
the wealthiest 10% of households hold an average 1.4
million euros of net-wealt h, which is 27 times more than
the median household. The share of aggregate wealth
in Germany held by the wealthiest decile accounts for
over 60% of total net private wealth. By contrast, the
least wealthy 10% in Germany tend to have a negative
stock of wealth, i.e. their debts exceed their assets.
The distribution of wealth in Germany is oen
shown to be relatively unequal compared to interna-
tional standards, judging from various measures such
as the Gini-coeicient and ratios of dierent wealth
deciles (Pham-Dao 2016). Important motives for accu-
mulating wealth are to provide for old age, i.e. stabilise
consumption levels aer retiring, and to insure against
several t ypes of unforeseeable life ri sks, e.g., the loss of
employment. Based on cross-countr y data from the
Household Finance and Consumption Survey (HFCS),
Fessler and Schürz (2015) show that more generous
welfare states are generally characterised by higher
wealth accumulation by those individuals with only
limited or no access to s ocial transfer syste ms and pen-
sion claims. For example, the social insurance scheme
in Germany is mostly tailored to ‘regularly’ employed
workers, while self-employed individuals mostly need
to provide for risks and retirement on their own. Figure
2 shows that the dierence in the average wealth hold-
ings of self-employed and non-self-employed individu-
als increases with age before peaking at the usual
retirement age of 65.
An assessment of the extent of inequality, espe-
cially as part of a cross-country comparison, without
properly accounting for country-specific rules for
accessing social security schemes provides an incom-
plete picture only and is likely to overstate the inequal-
ity that actually exists.
MODELLING A WEALTH TAX: THE CGE MODEL
The economic eects of a tax reform are very complex
and include more obvious first-order eects, but also
less obvious second-order and feedback eects that
can be substantial in size. Computable general equilib -
rium (CGE) models have proven to be a useful instru-
Clemens Fuest
ifo Institute, CESifo,
Ludwig-Maximilians-
University Munich.
Florian Neumeier
ifo Institute.
Michael Stimmelmayr
ETH Zurich, CESifo.
Daniel Stöhlker
ifo Institute.
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ifo DICE Re port 2 / 2018 June Volume 16
ment to simulate the consequences of counterfactual
tax reforms. CGE models make it possible to quantify
the economic and fiscal eects of tax reforms taking
behavioural responses as well as the interactions and
interdependencies between economic agents and sec-
tors into account. Figure 3 illustrates the most impor-
tant building blocks of the CGE model used in our anal-
ysis, which is based on Radulescu and Stimmelmayr
(2010).
The CGE model builds on neoclassical growth the-
ory and incorporates several tax sensitive behavioural
margins on the firm and household level. In detail, the
model incorporates firms with dierent legal forms,
i.e., corporate and non-corporate firms, which dier
with regard to their economic characteristics and their
legal tax treatment. Each firm faces an inter-temporal
investment problem, an optimal financing problem of
investments and a labour input problem.
The household is modelled by a representative
agent who maximises her life-time utility by choosing
the optimal inter-temporal
consumption and savings
paths and optimal labour sup-
ply in the presence of various
tax distortions. With regard
to the savings decision, the
household faces a portfolio
choice problem. There are
six dierent types of assets
the household can invest
in, grouped into three asset
classes, namely rm equity/
bonds, government bonds,
as well as real estate hold-
ings. In the applied model, the
wealth tax is levied on these
six assets. While the dierent
assets within each class are
perfect substitutes, the dier-
ent asset classes themselves
are imperfect substitutes,
reecting, for example, dier-
ences in default probabilities.
The model als o features a gov-
ernment and a foreign sector
allowing for links between
the domestic economy and
the rest of the world. The gov-
ernment consumes, imposes
taxes and collects tax reve-
nues and pays transfers to
the household sector in a
lump-sum fashion. The gov-
ernment’s budget is required
to be balanced. Like the
domestic economy, the for-
eign economy also comprises
a representative rm, a re-
presentative household and
a government sector. The two economies engage in
trade with each other and the model allows for cross-
country ownership of the dierent types of assets.
Overall, the CGE model represents a dynamic,
micro-based two-country macroeconomic model,
where the fore ign economy is relatively large compa red
to the domestic economy. The dynamic nature of the
model makes it possible to study the adjustment pro-
cess from the initial to the final steady state equilib-
rium. This is particularly important since investment
and savings decisions are, by nature, forward-looking.
It is worth noting that the introduction of a wealth tax
is eectively equivalent to an increase in the tax rate on
the return of t hose assets that are subj ect to the wealth
tax. If we assume that the (average) return on those
assets is 4%, then a wealth tax rate of 1% is equivalent
to an increase in the tax rate on asset returns of 25 per-
centage points. Thus we can expect even seemingly
small wealth tax rates to have a significant economic
impact.
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
12345678910
Total wealth Average wealth
Source: Bundesbank, 2nd wave of PHD data (2014).
Distribution of Net Wealth in Germany
© ifo Institute
Euros
Wealth decile
Figure 1
0
250,000
500,000
750,000
1,000,000
1,250,000
1,500,000
1,750,000
16-25 26-35 36-45 46-55 56-65 66-75 > 76
Self-employed Non-self-employed
Source: Bundesbank, 2nd wave of PHD data (2014).
Comparison of Wealth Holdings among Self-Employed and Non-Self-Employed
W
orkers
© ifo Institute
Euros
Age group
Figure 2
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ifo DICE Re port 2 / 2018 June Volume 16
THE ECONOMIC EFFECTS OF A WEALTH TAX
IN GERMANY
We consider three dierent scenarios to study the con-
sequences of dierent wealth tax concepts and to test
the sensitivit y of the estimated eects with regard to
dierent tax rates. In the baseline scenario, we model a
comprehensive wea lth tax with a uniform tax rate on a ll
assets. In the policy scenario, we assume that the tax
burden on corporate equity is lower than for the other
assets. This scenario better reflects the actual propos-
als made by some German political parties. Most of
these proposals foresee lower taxes on corporate
asset s to protect jobs. In the CGE mo del, we account for
the lower tax burd en on firm equity by apply ing a lower
wealth tax rate. In a t hird scenario, we move from a syn-
thetic to what we call a dual wealth tax and let the tax
rate vary across assets according to their degree of
mobility or tax elasticity, respectively. That way, the
welfare loss associated with the introduction of a
wealth tax can be reduced. In this instance, we apply a
relatively lower tax rate to financial assets and firm
equity; and a relatively higher tax rate to real estate
property. In our simulation exercise, we set the wealth
tax rate equal to 0.8% in the baseline scenario. In the
policy scenario, the tax rate is 0.4% for firm equity and
1.0% for all othe r assets. For th e dual wealth tax, the tax
rate is 0.4% on financial assets and firm equity and 1%
for real estate property. The tax rates are chosen so
that the (gross) revenues from the wealth tax are
roughly equal across the scenarios. In all three scenar-
ios, we assume a tax-free amount of 1 million euros for
singles and 2 million euros for married couples. Thus,
the wealth tax concepts considered in our analysis
would only target the 2-3% wealthiest households in
Ger many.
Table 1 shows the results of the simulations. It is
important to note that caution is required when inter-
preting the estimates. The numbers indicate the rela-
tive deviation (measured in percent) between the real-
isation of a variable when accounting for the
introduction of a wealth tax and a reference value that
is computed based on the assumption the status quo is
maintained. Furthermore, the figures refer to the long-
run eects of a wealth tax aer economic agents have
fully adjusted to the new situation. In this respect, we
assume that without the introduction of a wealth tax,
potential GDP in Ge rmany would grow at an annual rate
of 1.25% (Bundesbank 2012). The estimates set out in
Table 1 make clear that the introduction of a wealth tax
– no matter what form it takes – would have a noticea-
ble adverse eect on economic activity in Germany. In
the case of a comprehensive wealth tax with a uniform
tax rate on all assets (baseline scenario), long-run GDP
is expected to be roughly 5% lower than without a
wealth tax. Assuming that half of the adjustment pro-
cess is completed aer eight years (Cummins et al.
1996), this implies that the annual growth rate of poten-
tial GDP declines by about 0.33 percentage points in
response to the introduction of a wealth tax. On the
firm side, we observe a significant decline in produc-
tion by over 5% and investments by over 10%. The rea-
son for this is that the wealth tax dampens the rate of
return on investments, as the introduction of the
wealth tax is equivalent to a substantial increase in the
income tax. The eect is particularly pronounced
among foreign investors, since they find it easier to
withdraw capital from Germany in order to avoid being
subject to the wealth tax. Similarly, turning to the
financing of projects within firms, we can see an
increase in the debt ratio of around three percentage
points, as firms can avoid paying the wealth tax when
they use bor rowed capital instead of the ir own retained
wealth to finance investments. The slump in produc-
tion and investment has impor tant implications for the
labour market, too. The estimated long term drop in
employment due to the introduction of a wealth tax is
about 2%.
Turning to the household sector, we find a drop in
the stock of wealth by almost 25% and aggregate sav-
Interest rates
Real
Estate
Taxes
Firms
Corporate firms, non-
corporate firms, foreign
direct investments
Profit maximization by
optimal choice of
investments, labour
demand and financing
Households
Utility maximization by opti-
mal choice of consumption,
labour supply and portfolio
composition
Rest of the World
Firm sector, government
and household
Government
Consumption,
issueing of
government bonds
Stylized Depiction of the CGE-Model
Source: Authors’ illustration. ©ifoInstitute
Interest rates
Interest
rates
Taxes
Taxes Transfers, interest rates
Consumption
Consumption
Wages, dividends, interest rates
Imports
Exports
Rents and
leasings
Figure 3
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ifo DICE Re port 2 / 2018 June Volume 16
ings by over 40% . The reason for this finding is t wofold:
firstly, the adverse eect of the wealth tax on economic
activity is associated with a decline in income per cap-
ita, involving lower s avings. S econdly, as the wealth tax
reduces the income from wealth, the incentives to save
part of their income and accumulate wealth decreases .
Instead, households tend to consume a larger share of
their income, which is why the eect of the wealth tax
on consumption is rather modest.
The estimates presented in Table 1 also reveal t hat
the economic costs associated with the introduction of
a wealth tax are som ewhat lower in the policy scenari o,
as well as in the cas e of a dual wealth tax. The reason f or
this is that the tax burden on firm equity (policy sce-
nario), as well as on financial wealth (dual wealth tax),
is lower than in the baseline scenario. Both firm equity
and financial wealth are particularly sensitive to taxa-
tion and important for production. The adverse eect
on economic activity is nevertheless still notable. The
estimated long-run decline in GDP is about 4.5% in the
policy scenario and 4% in the case of a dual wealth tax.
Assuming again that half of the adjustment process is
completed aer eight years, this implies a reduction in
the annual growth rate of potential GDP of about 0.29
(policy scenario) and 0.25 percentage points (dual
wealth tax), respectively. The adverse eect of the two
alternative wealth t ax concepts on the othe r macroeco-
nomic aggregates is smaller as well.
TAX REVENUES FROM WEALTH TAXATION
Does the wealth tax pay o in fiscal terms, as oen sug-
gested in the current debate? Considering the wealth
tax in isolation, we can see that is does indeed have a
substantial revenue potential (Table 2). The (gross)
annual wealth tax revenues vary across the three sce-
narios between 16 and 18 billion euros in the short-run
and 13 to 15 billion euros in the long-run. At the same
time, though, we find that the public revenue increase
stemming from the wealth tax is more than oset by a
decline in revenues from other taxes. The drop in reve-
nues from the labour income tax and the sales tax in
particular are substantial. As a result, the overall fiscal
eect of introducing a wealth tax is expected to be neg-
ative, generating a loss of around 24 billion to 31 billion
euros annually, depending on the wealth tax concept.
The main reason for this is
that, while the wealt h tax reve-
nue itself is generated only by
a small number of taxpayers –
only around 2-3% of the Ger-
man population have wealth
holdings that are higher than
the tax-fre e allowance of 1 mil-
lion or 2 million euros, respec-
tively – its burden is carried by
virtually everyone, as indi-
cated by the decline in GDP,
investment, and employment.
It is important to note that the
administrative costs, as well
as the compliance costs asso-
ciated with a wealth tax, are
not included in our estimates.
RE-DISTRIBUTIONAL
EFFECTS OF
THE WEALTH TAX
Our analysis also sheds light
on the redistributive eects of
a wealth tax in the sense that it
allows us to assess how intro-
ducing a wealth tax aects the
ratio between capital and
labour income. Since the
wealthiest households typi-
cally mostly receive income
from capital rents and busi-
ness profits, the capital/labour
income ratio tells us how eec-
tive the wealth tax is in pro-
Tab le 1
Economic Implications of a Wealth Tax in Germany
Variable (in %) Baseline Scenario
Uniform wealth tax
= 0.8%
Policy Scenario
Wealth tax = 1.0%
Tax on rm equity
= 0.4%
Dual Wealth Tax
Wealth tax = 1.0%
Favoured wealth tax
= 0.4%
Gross Domestic Product (GDP) −5.14 −4.49 −3.96
Firm Sector
Production −5.16 −4.50 −3.95
Domestic Firms −4.30 −4.94 −4.20
Foreign Firms −11.99 −0.98 −1.95
Investments −10.25 −8.82 −7.79
Domestic Firms −9.22 −9.47 −8.18
Foreign Direct Investments −16.97 −4.59 −5.24
Employment −2.08 −1.86 −1.63
Debt Ratio (in % points) +3.81 +3.17 +2.89
Real Estate Sector
Property & Housing −1.27 −1.46 −1.32
Household Sector
Consumption of Households −4.07 −4.24 −3.50
Savings of Households −41.33 −39.48 −31.26
Wealth of Households −24.65 −26.92 −23.28
Source: Authors’ computations.
Tab le 2
Fiscal Consequences of a Wealth Tax in Germany
Variable (in bn. €) Baseline Scenario
Uniform wealth tax
= 0.8%
Policy Scenario
Wealth tax = 1.0%
Tax on rm equity
= 0.4%
Dual Wealth Tax
Wealth tax = 1.0%
Favoured wealth tax
= 0.4%
Wealth tax revenues (short-run) +18.12 +17.90 +15.85
Wealth tax revenues (long-run) +14.74 +14.04 +13.11
Revenues from other taxes −46.10 −43.55 −37.26
Labour income tax −22.13 −19.84 −17.36
Value added tax (incl. indirect taxes) −12.76 −13.29 −10.98
Corporate taxes −6.78 −5.26 −4.59
Capital gains taxes −4.39 −5.13 −4.29
Net (long-run) −31.36 −29.52 −24.14
Source: Authors’ computations.
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ifo DICE Re port 2 / 2018 June Volume 16
moting economic inequality. Figure 4 illustrates the
development of the ratio between capital income – or,
more precisely, corporate profits and capital rents –
and labour income. Th e ratio decreases in all three s ce-
narios, indicating that the gap between capital and
labour income diminish es over time. A smaller ratio can
be explained by the fact that capital income growth is
reduced more than labour income growth – it does not
reflect a re-distributive eect of the wealth tax in the
strictest sense of the term. To put it bluntly, instead of
giving wage earners a larger piece of a given cake, the
cake becomes smaller and wage earners lose a smaller
piece than capital earners. It is interesting to note that
this eect is most pronounced in the policy scenario,
despite the reduced wealth tax rate for firm equity.
SUMMARY AND CONCLUDING REMARKS
Taxing wealth in order to alleviate economic inequality
and to generate additional public revenues is a recur-
rent theme in the political debate. However, our analy-
sis demonstrates that a wealth tax can have a notable
adverse impact on economic activity, reducing eco-
nomic growth, investment and employment. A s a
result, the bur den of a wealth tax is practi cally borne by
every cit izen, even if the wealth tax is de signed to target
only the wealthiest individuals in society, via high tax-
free allowances, for instance. Moreover, the introduc-
tion of a wealth tax in the form considered in our anal-
ysis would actua lly lead to a decline in total tax reve nue,
as the revenue gains from a wealth tax are notably
lower than the decline in revenues from other taxes,
especially the labour income tax and the sales tax.
Thus, a wealth tax fails to significantly promote eco-
nomic equality or create additional fiscal leeway.
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Cingano, F. (2014), “Trend s in income inequal ity and its impa ct on eco-
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– medium- term outlook aga inst the backdrop o f demographic st rains,
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Ostr y, J., A. Berg and C. G . Tsangar ides (2014), Redistribu tion, inequalit y,
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0.32
0.33
0.34
0.35
0.36
0 10 20 30 40 50
Uniform wealth tax of 0.8%
Policy scenario
Dual wealth tax
Source: Authors
computations.
F
unctional Distribution of Income aer the Introduction of a Wealth Tax
(
Firm profits + interest income) / labour income
Years since introduction of the wealth tax
%
Figure 4
... 44 A recent study by German economists assesses the economic and fiscal consequences of a hypothetical reintroduction of a wealth tax in Germany and estimates expected revenues. 45 The authors of the study assume a baseline wealth tax rate equal to 0.8 percent (significantly lower than the one proposed in the United States) and find that, no matter what form it takes, it would have a noticeable adverse effect on economic activity in Germany. Specifically, annual GDP growth would decline by 0.33 percent, production would decline by 5 percent, and investment would decline by 10 percent. ...
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In this paper we develop the dynamic CGE model, ifoMod, which is designed to analyse the impact of fundamental tax reforms and in particular capital income tax reforms for Germany. The model is in line with neoclassical growth theory and features all important behavioural interactions between the four major building blocks of an economy including the firm and household sector, the government and the rest of the world. We consider firms of different legal forms which all face an intertemporal investment problem, a financing problem w.r.t. the optimal choice of debt and equity financing as well as a factor input problem when deciding on the optimal amount of different skill types of labour employed. We show the impact of different types of taxes on the behavioural margins of firms and households. The conducted simulation shows the impact of the latest German corporate tax reform of 2008 on the German macroeconomic variables such as investments, GDP, consumption and household's welfare.
Trends in income inequality and its impact on economic growth
  • F Cingano
Cingano, F. (2014), "Trends in income inequality and its impact on economic growth", OECD Working Paper No. 163.
Potential growth of the German economy -medium-term outlook against the backdrop of demographic strains
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Public Insurance and Wealth Inequality -A Euro Area Analysis
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Pham-Dao, L. (2016), "Public Insurance and Wealth Inequality -A Euro Area Analysis", mimeo.