The German Institute for Economic Research suggests that the state provide young people with EUR 20,000 in start-up capital. In an interview, economist Bach explains what the money is intended for, how it should be raised and how realistic it is for the idea to become reality.
Basic inheritance, what is it all about?
Stefan Bach: We see it as an instrument to counteract the very unequal distribution of wealth in Germany and the low wealth of the middle classes. The existing instruments and programs are simply not sufficient for this.
What is planned?
Promotion of home ownership for emerging households, better old-age provision, higher allowances so that people can build up more financial assets. The traffic light coalition has big plans. But that only lowers wealth inequality a little and only in the long term. We’re already talking about a generation. If we want to get to Potte faster, we have to become more effective.
And that brings us to the basic inheritance?
Exactly – then we have to redistribute wealth. The idea has been discussed internationally for a long time. The British economist Tony Atkinson, for example, recommended this in his last years, and Thomas Piketty once made a suggestion that went much further.
What would your idea of the basic inheritance look like in concrete terms?
Stefan Bach is a research associate at the German Institute for Economic Research in Berlin. His main focus is on taxes, public finances, distribution, social policy and microsimulation models.
The state provides start-up capital for every young person, whether at 18 or better at 25, if most of them have also overcome late puberty, we can still discuss that. Of course you shouldn’t give people the money freely, not “Cash in de Täsch”, as the Cologne native says, but earmarked for training financing, building home ownership, building financial assets, setting up companies, perhaps also for further training programs or caring for relatives. The details have to be worked out in more detail. The key word here is life chances credit or chance account, the Ministry of Labor and Social Affairs has developed concepts for this. As people get older, they can then put unused amounts into retirement benefits or get them available.
How much money are we talking about here?
That depends on how much you dare to finance. With the birth cohorts of around 750,000 young adults that we currently have in Germany, 20,000 euros per nose equates to 15 billion euros per year.
A lot of money.
Yeah, that’s a lot of cash.
How are we supposed to finance this?
We are talking about 0.4 percent of the gross domestic product and of course we do not have that readily available – see traffic light and debt brake. The big taxes are sales tax and personal income tax, and if you increase them, the masses fill the cash register. But that’s not realistic. It makes sense to finance the basic inheritance through a higher inheritance tax or other wealth taxes.
Why is that obvious?
Because of the very unequal distribution of wealth in Germany. The problem continues because few people will inherit very much and very many very little. The top ten percent own two thirds of the wealth in Germany, the top one percent own ten percent of the wealth, the richest 0.1 percent, that’s around 60,000 people, own 20 percent of the wealth. Of course, this continues in the succession of generations.
But why an inheritance?
Only around ten to 20 percent will at some point inherit an amount that is over 100,000 euros, which means something can already be started with. And they can plan their lives accordingly in anticipation of this amount. In addition, most of them are already older when they inherit, around 50 or 60, and are then actually already out of the woods. They then have their wealth planning, their house building or the family phase behind them and then it doesn’t really help that much anymore.
Then who should be charged?
We recommend charging high assets, roughly calculated, from 1 to 2 million euros per person. This already noticeably reduces the Gini coefficient, the standard measure for wealth distribution.
Would it also be an idea to finance the whole thing through a wealth tax?
That would be conceivable. As economists, however, we recommend inheritance tax because it is less distorting, has fewer economic disadvantages and only has to be levied once in a lifetime. We estimate that there could be 7 to 8 billion euros more a year. We are rather skeptical about wealth tax. Such a tax should be considered for the super-rich, for example from 20 million euros. In the US, that was an issue in the last presidential campaign.
Are you not moving with your idea in an ideologically highly competitive field?
Well, we’re tickling the conservatives or the neoliberals a bit. They always want “prosperity for everyone” see Ludwig Erhard. Wealth formation in the hands of employees and for broad sections of the population has been an issue since the 1960s at the latest. But it did not help much – because they were not prepared to redistribute on a larger scale. That was also their problem in the recent Bundestag election campaign: If you are not prepared to burden the top five percent with high incomes and assets, you have no money to relieve the lower 95 percent of the population.
You say that every young person should get money – but that shouldn’t apply retrospectively, right?
Sure, there is a transition problem. But you wouldn’t ramp it up overnight, but introduce it slowly. For example, by starting at 1000 euros and then after 20 years we will be at 20,000.
What would be a counter-proposal to your idea of the basic inheritance?
Many believe that the money should rather flow into the care and educational infrastructure, i.e. in daycare centers, elementary schools, schools or even in universities. This is important for social integration and educational success. Many see a higher social return here. One does not exclude the other, but of course there have to be priorities when funds are scarce.
How realistic do you think it is that a basic inheritance will come?
Let me put it this way: We threw a stone into the water to stimulate waves of discussion. The great inequality in wealth and inheritance will be with us for a long time to come.
Bastian Hosan spoke to Stefan Bach
The interview is at first “Capital” appeared