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Are Inheritance Tax Privileges for firms reasonable?

In modern societies every member has to pay taxes. They are paid to the public sector, which spends money on public goods and aims to reduce inequality through redistribution. However, taxes – especially inheritance taxes – often become topic of emotional discussions regarding fairness. Inheritance is capital, which the heir gets without putting effort in it, from the economics point of view paying taxes on heritage is justified to provide equal opportunities within society.

In 2009 the inheritance tax law in Germany changed, giving larger tax privileges to companies. The idea behind it was to guarantee the surviving of the company, since it was feared that the firm would not be able to pay the tax without harming its business. To get the privileges firms have to prove the continuing existence and keep the amount of workers constant. The former minister of finance Peer Steinbrück argued that due to these regulations family run businesses – which are essential for the German economy – could be protected.

However there are numerous arguments against privileging businesses. For instance some studies even find negative effects on passing on business within the family since managers of the firm are elected by being a family member and not by being the best-qualified person for this job. Also the time and the effort spend on making use of the privileges should be taken into account. In economic terms we refer to this as costs the firm has to burden.

To answer the question if inheritance tax privileges are reasonable it has to be investigated if the firm would have performed differently without the privileges. Since it is impossible to run an experiment in the real world having the two cases in which the firm is once taxed and once not, economists tried to answer this question using data from Germany before 2009, where the tax system had less privileges for businesses. Within the experiment they calculated different tax burden situations and compared them. As one result they could not find evidence that the former inheritance taxes would endanger firms and come to the conclusion that the large privileges given by the new system are not justified.

Nevertheless the advisor council for the ministry of finance suggests that companies should be able to request a respite, which means that they can pay the taxes later if the company is in serious danger at that moment of time.

Also the Federal Constitutional Court decided that the law issued in 2009 is not constitutional and has to be changed. The main criticism was that even really big companies could make use of the exceptions and big parts of administrative property – for example properties used by third parties – could also be given to the next generation without being taxed. Since 2016 the law is changed in the sense of harder regulations if heirs want to make use of the privileges. However, rather than modifying the regulations the privileges itself should be questioned and overthought.

Katharina Fietz

 

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Author: studentnovasbe

Master student in Nova Sbe

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