Wealth Tax

The Vermögensteuer (wealth tax) is being hotly debated in the press once again. The latest study, this one authored by the DIW, suggests to raise an additional 25 bn € by levying a 1 % tax on private wealth in excess of 500,000 €.

In principle, I tend to agree that the lack of demand we are currently facing could be eased by taking money away from the rich (which tend to be big savers) and spending it on the poor (which tend to save little or nothing).

However, in practice this becomes rather tricky:

- How do you measure "private wealth"? One of the reasons why the Vermögensteuer was abolished was that revenue was comparatively small, yet the work involved in assessing it was quite big, i.e. lots of tax inspectors needed to toil away, and lots of tax advisers needed to help filling out the forms. It wasn't exactly an efficient way to raise tax revenue. In particular, how do you deal objectively with real estate and with stakes in non-traded company? The "old solution" was to tax it very lightly. But that of course is unfair, and it also reduces tax revenue.

- The other reason for abolishing the tax was that the constitutional court had declared it to be unconstitutional, because it implied a marginal tax rate of more than 50 % on the income of rich people, and for some reason, the German constitution does not allow for taxation in excess of 50 % (I never quite understood why, though).

- In any case, a wealth tax of 1 % in addition to the 25 % tax on capital income and 48 % top income tax bracket would surely drive many of the remaining ultra-rich abroad: An individual with a net worth of 1 bn € would have to pay an additional 10 m € per year in taxes, on top of what he is already paying.

- Considering the current low money-market of roughly 1 %, many people might even find it more attractive to turn their savings into cash and stash the cash in a safe box or under the mattress. After all, 1 % interest minus 25 % income tax and minus 1 % wealth tax equals -0.25 %. Putting the money under the mattress equals zero.

I'm not sure how the DIW arrived at 25 bn € in tax revenue. But considering all these points, I highly doubt that a 1 % tax on wealth in excess of 500,000 € would yield anywhere close to 25 bn €. But at least it would provide stable jobs to thousands of newly hired tax inspectors...

(According to Wikipedia, the Vermögensteuer was payable until 1996. In 1996, it yielded 4.5 bn € in revenues, and cost 150 m € to collect. Tax-rates were 0.5-1.0 %, depending on asset class. Sure, wealth has grown since 1996, but it hasn't exactly exploded. The gap between 4.5 bn € of revenues back then, and the claim of raising 25 bn € now seems hard to reconcile.)