The Inheritance and Gift Tax in Germany Reform

The Inheritance and Gift Tax in Germany Reform Potentials for Tax Revenue, Efficiency and Distribution Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen

Agenda 1 Motivation 2 Inheritances and the net wealth distribution 3 Tax base effects of the reform 2008 4 Revenue potentials and reform options 5 Conclusion Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 2

Motivation • The inheritance tax is often seen as a „good“ tax from an equity and efficiency perspective (OECD, 2018) • The growth of the inheritance volume is supposed to continue due to the demographic change • The question arises if this is the tax to rely future revenues on instead of taxing labour • Tax assessment is costly but it usually takes place only once per generation Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 3

Motivation • Tax is subject to legal challenges • Critical points: Valuation methods, tax exemptions, high compliance costs • Behavioral responses, tax planning? • Is it really creating more equity and efficiency? Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 4

Data • Household Finance and Consumption Survey (HFCS) • First conducted in 2010 under the supervision of the European Central Bank (ECB) • Second wave was collected in 2014 and is used for analyses • Harmonised data for more than 84, 000 households • 18 euro area countries (not Lithuania) plus Hungary and Poland • Rich information on assets, liabilities, income and consumption of households • Data on the time and value of the three most important inheritances and gifts inter vivos a household has ever received • Oversampling of wealthy households Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 5

Equity: Gini coefficients for different wealth types In 2014 and in prices of 2010 1. 2 Gini coefficient 1 0. 8 0. 6 0. 4 0. 2 0 PT IT Capitalized bequests ES Net wealth FR DE AT Net wealth excl. capitalized bequests Note: A real capitalization rate of 3 percent per year is assumed for bequests. Source: HFCS, 2 nd wave; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 6

Efficiency: German inheritance and gift tax law changes • Reform 2008: - Higher personal allowances (especially for transfers within the close family) - Higher tax rates for tax class II (e. g. siblings) and III (third parties) - New valuation methods for businesses - Replacement of general tax allowance for business assets with tax exemptions under conditions Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 7

Personal allowances Personal tax allowance Tax class (§ 16 Inheritance tax law) (§ 15 Inheritance tax law) for spouse and partner of a registered civil partnership 500, 000 € I 400, 000 € I 200, 000 € I 100, 000 € I for parents and grandparents in the case of gift, for siblings, children of siblings, stepparents, children in law, parents-in-law, divorced spouses and life partner of a cancelled civil partnership 20, 000 € II for all other recipients of a gift or inheritance 20, 000 € III for children and grandchildren whose parents have died, as well as for stepchildren and adopted children for grandchildren for great-grandchildren; for parents and grandparents to acquire by inheritance Source: German inheritance tax and gift tax law, own illustration Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 8

Tax rates in percent/ tax bracket in Euro Tax class III up to 75, 000 7 % 15 % 30 % up to 300, 000 11 % 20 % 30 % up to 600, 000 15 % 25 % 30 % up to 6, 000 19 % 30 % up to 13, 000 23 % 35 % 50 % up to 26, 000 27 % 40 % 50 % up to 26, 000 30 % 43 % 50 % Source: German inheritance tax and gift tax law, own illustration Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 9

German inheritance and gift tax law changes • Reform 2008: - Higher personal allowances (especially for transfers within the close family) - Higher tax rates for tax class II (e. g. siblings) and III (third parties) - New valuation methods for businesses - Replacement of general tax allowance for business assets with tax exemptions under conditions • Reform 2016: - Correction of the valuation method for businesses - Conditions for the tax exemptions were expanded to a larger circle of companies - Lower tax exemptions for large companies, means-tested tax exemptions Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 10

Inheritance volume in Germany In billion Euro and prices of 2010 Germany 500 120 450 100 400 350 80 300 250 60 200 40 150 100 20 50 0 0 1996 -1999 2000 -2003 Period total (left scale) 2004 -2007 2008 -2011 2012 -2014 Yearly period average (right scale) Critical assumption: Common trend before policy change Source: HFCS, 2 nd wave; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 11

Inheritance volume in Germany and France In billion Euro and prices of 2010 Germany France 500 120 450 100 400 100 350 80 300 250 60 200 40 150 100 20 50 0 0 1996 -1999 2000 -2003 Period total (left scale) 2004 -2007 2008 -2011 2012 -2014 Yearly period average (right scale) Source: HFCS, 2 nd wave; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 12

Difference-in-difference estimation (Di. D) Germany vs. France, 4 periods Variable Observations [95% Conf. Interval] Coef. Std. Err. t-value P>t 8, 482 5, 530 1. 53 0. 125 -2, 357 19, 322 70, 319 16, 779 4. 19 0. 000 37, 418 103, 219 -67, 325 19, 401 -3. 47 0. 001 -105, 408 -29, 242 89 266 0. 34 0. 738 -434 612 61, 152 14, 536 4. 21 0. 000 32, 580 89, 724 5, 118 Note: Period 1: 1996 -1999, period 2: 2000 -2003, period 3: 2004 -2007, period 4: 2008 -2011. All inheritances are measured in prices of 2010. Treatment took place in Germany. Standard errors are calculated using multiple imputation estimates from five imputations. Source: HFCS, 2 nd wave; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 13

Personal tax allowances divided by inheritances and gifts 50% 45% 40% 35% 30% 25% 2007 2008 2009 2010 2011 2012 Inheritances and gifts (total) 2013 2014 only Inheritances 2015 2016 2017 2018 only gifts Source: Destatis; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 14

Tax exemptions divided by inheritances and gifts 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2007 2008 2009 2010 2011 2012 Inheritances and gifts (total) 2013 2014 only Inheritances 2015 2016 2017 2018 only Gifts Source: Destatis; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 15

Average inheritance tax rate Tax revenue divided by the final tax base 29% 24% 19% 14% 9% 4% 2007 2008 2009 2010 2011 2012 Inheritances and gifts (total) 2013 2014 only inheritances 2015 2016 2017 2018 only gifts Source: Destatis; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 16

Effective inheritance tax rate Tax revenue divided by the total value before any deductions 14% 12% 10% 8% 6% 4% 2% 0% 2007 2008 2009 2010 2011 2012 Inheritances and gifts (total) 2013 2014 Inheritances 2015 2016 2017 2018 Gifts Source: Destatis; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 17

u Fr m an Fin ce la n Ko d Un r ite J ea d ap K a Ne ingd n th om er la nd s Sp D ai Lu enm n xe a m rk b Ge our g Sw rm a itz ny er la Ice nd la Un Ire nd OE ited lan CD St d - ate Av s er ag e Ch Gr ile ee ce I Hu taly ng Slo ary ve n Tu ia rk Po ey la Ca nd na d La a Lit tvia hu a No nia rw Au ay s Cz Au tria ec st h ra Re lia pu b Es lic to ni a Isr a Ne Me el w xic Ze o a Slo P land va ort k R ug ep al ub Sw lic ed en lgi Be Inheritance tax in percent of GDP (OECD countries for 2017) 0. 7 0. 6 0. 5 0. 4 0. 3 0. 2 0. 1 0 Source: OECD database, own illustration Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 18

Development of the long term tax revenue in Germany 550% 500% 450% 400% 350% 300% 250% 200% 150% 100% 1991199219931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018 Inheritance and gift tax revenue Total tax revenue Source: Destatis; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 19

Revenue potentials of the tax • The total volume of inheritances and gifts is estimated to lie between 200 and 400 billion Euro (Tiefensee/Grabka, 2017; Bach/Thiemann, 2016; Braun, 2015; Schinke, 2012; Brunner, 2014) • 100 billion Euro is observed above the personal allowances in the statistics • Lower personal allowances are politically challenging • Bach et al. (2014) estimated that a general personal tax allowance of 100, 000 Euro regardless the degree of relationship and a flat tax of 10 percent would increase the tax revenue by 20 percent -> + 1. 4 billion Euro in 2018 • Demographic change? Business cycle effects? Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 20

Is a flat tax with broader tax base the solution? • Lower tax assessment costs and bureaucracy are desirable • High uncertainty about the conditions for possible tax exemptions • More clarity and less uncertainty about the actual tax liability is important • Need for better and fairer tax deferral options (irrespective of a flat tax) • Flat tax implies higher tax rates on medium-sized companies, lower tax rates on large business assets (Beznoska / Hentze, 2017) Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 21

Reform scenario • The volume of tax exemptions for business assets was about 40 billion Euro per year • Taxing it with a flat tax of 10 percent brings 4 billion Euro revenue • Tax loss on the actual tax base is 3. 2 billion Euro (average tax rate was 19 percent) Ø 0. 8 billion Euro more revenue (nearly budget-neutral) Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 22

Reform scenario Flat tax rate 10% 15% 20% In billion Euro per year Tax revenue 7. 5 11. 2 14. 9 Difference to status quo 0. 8 4. 5 8. 3 Estimated labor supply responses for a revenue-equivalent tax cut of the income tax In percent of total hours worked Women - 0. 10 0. 19 Men - 0. 06 0. 11 Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 23

Reform scenario 45 40 35 30 25 20 15 10 5 0 0 10, 000 20, 000 30, 000 Tax tariff 2019 40, 000 Tax tariff 2019 a 50, 000 60, 000 70, 000 Tax tariff 2019 b Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 24

Distributional effects In percent of gross income (tax relief); in percent of total hours worked (labour supply) 0. 3 0. 25 0. 2 0. 15 0. 1 0. 05 0 Decile 1 Decile 2 Decile 3 Decile 4 Tax relief Decile 5 Men's labour supply Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Women's labour supply Source: GSOEP data 2018 (v 34); microsimulation model Beznoska (2016); labour supply model from Stockhausen (2019); own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 25

Conclusion • Inheritances usually smooth the wealth distribution between generations but increase it within a generation • Effect of the inheritance tax on wealth distribution is not clear a priori • The inheritance tax has an impact on the tax base (e. g. via tax planning) • A flat tax would decrease tax assessment costs and uncertainty on tax liability Ø Higher tax burden on medium-sized companies, lower one on large business assets • Revenue potential of the tax is limited (at least for now) Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 26

Dr. Martin Beznoska @mbeznoska Dr. Maximilian Stockhausen @Stockhausen. Econ Public Finance and Distributional Analysis beznoska@iwkoeln. de stockhausen@iwkoeln. de www. iwkoeln. de

Coefficient of variation for different wealth types and countries Nettovermögen abzgl. Erbschaften/Schenkungen Net wealth excl. capitalized bequests Nettovermögen Net wealth Coefficient of Variation 16 14 12 10 8 6 4 2 0 BE IT IE PT ES DE FR AT LU USA Source: HFCS, 2 nd wave; own calculations Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 28

Flat tax Source: Beznoska/Hentze, 2017 Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 29

Inheritance volume in Germany and Austria In billion Euro and prices of 2010 Germany 600 200 180 160 140 120 100 80 60 40 20 0 500 400 300 200 100 0 1996 -1999 2000 -2003 2004 -2007 Period total (left scale) 2008 -2011 2012 -2014 Yearly period average (right scale) Austria 60 20 50 15 40 30 10 20 5 10 0 Source: HFCS, 2 nd wave; own calculations 0 1996 -1999 2000 -2003 Period total (left scale) 2004 -2007 2008 -2011 2012 -2014 Yearly period average (right scale) Zagreb, 24 October 2019, Dr. Martin Beznoska, Dr. Maximilian Stockhausen 30