Economic Evaluation of Different Wealth Tax Concepts

Tasks

With the discussion about income and wealth inequality gaining momentum in Germany, more attention has also been devoted to a possible wealth tax. Wealth taxes lie between the conflicting priorities of growth enhancing and redistributive policies, constitutional requirements, federal structures, negative incentives as well as administrative constraints with respect to properly evaluating wealth and levying taxes.

The primary goal of the project is to present several concepts of wealth taxes for Germany, discuss their legal implications, quantify the effects on key economic variables (among others gross national product (GDP), short and long-term output growth, investment activitities, employment, saving and consumption) and give projections of the revenues from wealth taxes.

Methods

The quantification of the economic effects of a wealth tax in Germany is based on a computational general equilibrium model (CGE) which is calibrated to the current economic environment in Germany. The model is based on a theoretically-founded, dynamic growth model which covers the domestic firm sector as well as private households and the government activities. It also incorporates domestic real estate holdings, assets held abroad by domestic citizens and interactions with other countries via foreign direct investment (FDI) flows as well as trade in capital and goods. Given the complexity of the model, it is particularly suited to analyze the various effects of different wealth tax proposals in Germany on key aggregate economic variables, specifically overall output as well as investment activities and employment levels.  

Results

The results of the study suggest that the introduction of a wealth tax in Germany would lead to a substantial drop in employment, investments, savings and overall economic growth – even given favoured tax rates on corporate wealth and high tax exemption levels. This is due to the fact that a wealth tax would dilute incentives for firms to invest and accumulate capital, which would, in turn, reduce the economy’s production capacities. The effect would be particularly strong among foreign investors who would probably withdraw their invested capital in response to the tax. The model simulations suggest that the introduction of a wealth tax would dampen the annual growth rate of the economy by 0.3 to 0.35 percentage points within the first eight years of its launch depending on the specific design of the tax.

The analysis also shows that a wealth tax would not pay off in fiscal terms, as the higher annual revenues from the wealth tax of around 14 billion euros would be more than offset by declining tax returns from other sources amounting to over 40 billion euros.

Study

Fuest, Clemens, Hermann O. Gauß, Andreas S. Bolik, Cornelia Kindler, Florian Neumeier, Ferdinand Pavel, Stefan Przybilka, Nico Schönberg, Michael Stimmelmayr and Daniel Stöhlker,Ökonomische Bewertung verschiedener Vermögensteuerkonzepte, Bundesministerium für Wirtschaft und Energie (BMWi), Berlin, 2017, 93, Information (BMWi) | Projektseite zur Studie | PDF Download