Inheritance Tax All in the Family

Germany’s finance minister wants to roll back laws that shield wealthy families from avoiding levies when they pass businesses on to their children. Although his plan is controversial, Wolfgang Schäuble may have no choice but to push forward.
Mr. Schäuble is breaking down the door.

It’s one of the third rails of German politics.

Germany’s small and medium-sized business owners, a wealthy and privileged class that has been passing down family fortunes for centuries, have a special status in Europe's biggest economy.

For years, German governments have preserved their lucrative, tax-free exemption – especially the center-right Christian Democratic party of Chancellor Angela Merkel, who in 2013 was elected to a third term in office.

But this week Ms. Merkel’s finance minister, Wolfgang Schäuble, proposed a major increase in inheritance taxes, outraging the wealthy.

“This is irresponsible, incompetent,” said Martin Schoeller, owner of a packaging business in Pullach, a town in Bavaria, that employs 5,500 people.

Mr. Schäuble’s proposal is politically explosive, and he knows it. But from the finance ministry’s point of view, there is no alternative – Germany’s top constitutional court ruled in December that there were too many exceptions to the county's inheritance tax, and demanded a new law by the middle of 2016.

Mr. Schäuble’s proposal is eroding our faith in the economic competence of the CDU and CSU. Lutz Goebel, Head of family-owned business association

Family owners accuse Mr. Schäuble, who initially promised a “minimally invasive” reform, of going beyond the court's demand.

In the process, the new inheritance reform risks alienating core CDU voters such as Mr. Schoeller – a business owner who is fiscally conservative – and increases the prospect of job losses at family-owned firms.

Business owners feel so put-upon by the proposal that Mr. Schoeller wishes for the political return of Gerhard Schröder, the Social Democratic predecessor to Ms. Merkel.

About 90 percent of businesses in Germany are privately-owned. They include well-known firms such as Bosch, pharmaceutical giant E. Merck and Hartmann.

 

Charging Inheritance-01

 

Many of these families are the names behind the “Mittelstand,” the layer of small- and mid-sized private firms that make up the backbone of Germany’s economy.

Inheritance taxes have always been relatively low in Germany compared to other European countries and family-run businesses have been given preferential treatment. But an aging German population has made inheritance taxes an increasingly attractive source of revenue, which has led to the clash with family owners.

Mr. Schäuble’s proposal could well be tactical. He knows his proposal will be watered down, so he’s starting high.

Mr. Schäuble’s new and tougher tax proposal is “eroding our faith in the economic competetence of the CDU and CSU,” said Lutz Goebel, head of the association of family-owned businesses.

Mr. Schäuble’s reforms would set a threshold of €20 million for taxing inheritance. Anything below that amount can pass tax free. The finance ministry says this includes about 98 percent of all privately-held companies. Setting the threshold any higher would contravene the court’s ruling.

Even above €20 million, the tax depends on the private wealth of the family owner and would be limited if jobs could be at risk – but only so much.

The Cologne-based economics institute IW worked out a hypothetical case for Handelsblatt. A firm valued at €27 million, exempt under current law, would in future have to pay as much as €8.2 million in inheritance tax if the business is handed down. That amount would be limited if the family’s private fortune is below €20 million, but even if the heirs have no private wealth, they would still have to pay some €2.5 million to the government – money that would have to come from the business’s own coffers.

Taking a Chunk of Private Wealth-inheritance

 

Given the toxicity, Mr. Schäuble’s proposal at first glance seems a political dead end.

Ms. Merkel herself has not commented. Her finance minister wasn’t even given the chance to formally present his ideas at a meeting of the governing coalition Tuesday evening, according to government sources.

The CDU’s coalition partners in government, the conservative Bavarian Christian Social Union and the left-leaning Social Democrats have both suggested they won’t back the plans. A number of CDU party members have also come out in opposition.

“The proposal is anything other than minimally invasive,” said Carsten Linnemann, who heads a small-business faction within the CDU party. The party “will not carry this as it is,” he added.

Mr. Schäuble is used to playing bad cop. A long-time political operative who was once considered a future leader of the party, he has repeatedly been the politician to take on unpopular but principled positions. Lately he has been the European chiefly responsible for keeping Greece’s new Syriza party in line.

Given that history, Mr. Schäuble’s proposal could well be tactical. He knows his proposal will be watered down, so he’s starting high.

The finance ministry might eventually find an ally in the country’s 18 states. After all, the inheritance tax doesn’t flow into Mr. Schäuble’s own coffers – it flows to the country’s “Bundesländer.”

 

Jan Hildebrand and Daniel Delhaes cover financial policy and business for Handelsblatt out of Berlin. Axel Schrinner is an editor in charge of fiscal policy for Handelsblatt in Düsseldorf. Christopher Cermak is an editor covering finance and economics for Handelsblatt Global Edition in Berlin. To contact the authors: [email protected], [email protected], [email protected] and [email protected]