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“The problem is the exceptions”: How fair is it to inherit a lot of money?

Around 400 billion euros are inherited or given away in Germany every year. While some receive millions, many receive nothing. “In macroeconomic terms, Erben has eiNEN benefits,” says economist Jan Schnellenbach in an interview with ntv.de. However, he believes that changes to the inheritance system in Germany are necessary.

ntv.de: You don’t have to earn an inheritance. You get it as a gift. How fair is it to receive such an unearned income?

Jan Schnellenbach: When someone inherits many millions, I have the gut feeling at first that it’s unfair. The heir can live a carefree life while others have to work hard. But that doesn’t change the fact that the institution of inheritance also has a purpose. When it comes to this topic, you shouldn’t just look at the short-term distribution effects, i.e. that individual people are suddenly wealthy. You also have to look at the overall societal function of inheritance.

How does it look?

First of all, there is nothing wrong with parents inheriting something from their children that they have preserved or built up, and then the children continue to preserve or develop it. And part of the property rights of testators is that they can decide what to do with their property after their death. If they assume, for example, that a company is in good hands with their children, then they should be able to make decisions accordingly. From a family economic point of view, inheritances – including the prospect of them – also have the function of ensuring greater willingness to cooperate and mutual support in the family. And heirs also have benefits from an overall economic point of view. Especially in Germany, the grown structure of family businesses with a time horizon extending over generations also contributes to the stability of an economy, since they are less geared to very short-term profit maximization and more to long-term perspectives.

Jan Schnellenbach is an economist and teaches at the Brandenburg Technical University in Cottbus.

Business assets are favored for inheritance tax. Even very large fortunes are therefore taxed only slightly. Is this privilege really necessary for the common good?

As I said, basically there is a benefit. The continuity, the passing on from generation to generation, often means that owners have a closer bond with the company and the employees than employed managers. Medium-sized companies in Germany are characterized by this. That does not mean, however, that inheritance tax must be used to promote this as much as is currently the case. It would make sense to abolish the tax exemption rules and instead to go the way that has often been tried and tested in tax policy with lower tax rates, but few exceptions and appropriate allowances.

Large inheritances are not only criticized from the left. There are also arguments against it from a liberal point of view. One of them: It’s not fair when someone gets privileges without having earned them.

Yes, that is also a problem from a liberal point of view. There is a risk that privileges will also be inherited in the case of large inheritances and that, similar to a feudal system, a very narrow, very rich upper class will consolidate its power. The question is, however, whether great material wealth actually translates into great political influence. So far this has not been the case in Germany. Unlike in the USA, for example, political competition in this country is not systematically distorted by large fortunes. There are no politically powerful dynasties like the Kennedys or the Bushes.

Another objection: Large inheritances violate the performance principle and equal opportunities. Investor legend Warren Buffett does not believe in large inheritances and is in the process of donating most of his vast fortune. He wants to give his children “enough money so that they feel like they can do anything – but not so much that they feel like they don’t have to do anything”. A large inheritance destroys any business acumen in children, according to Buffett. So doesn’t it make sense to leave wealth to society rather than to descendants?

I don’t think large inheritances necessarily destroy any business acumen. There are – also in Germany – a lot of counterexamples. There are many companies that are successfully passed on from generation to generation. Of course, it can happen that someone who inherits many millions makes an effortless life and squanders the money. So what? Then he or she can live a comfortable or lazy life. But that also means that the assets are smaller and distributed among the people.

According to the DIW research institute, up to 400 billion euros are inherited or given away in Germany every year. According to the Federal Statistical Office, income from inheritance tax amounted to around 11 billion euros last year. The tobacco tax, on the other hand, brought 14.7 billion euros. Are the allowances for inheritance too high and is the inheritance tax too low?

The problem is not the allowances in and of themselves. The problem is the many exceptions, such as the exemption rules for business assets. In addition, there is the possibility of carrying out future-oriented inheritances through donations over a longer period of time and using tax-free allowances several times. There are too many loopholes that allow almost tax-free inheritance.

What would be an alternative?

An inheritance tax system that grants high allowances, but otherwise only a few exceptions. It is desirable to have as broad an assessment basis as possible with low tax rates at the same time. The burden of inheritance tax should be bearable, but it should also not be more or less completely avoidable.

Wealth in Germany is very unevenly distributed. According to the DIW, the top one percent owns around 18 percent of all assets – as much as the bottom 75 percent of the adult population combined. Isn’t it therefore particularly problematic that the inheritances are distributed so extremely unequally and that the wealth differences are cemented?

That’s a problem. But you have to look at it from the other side as well. Our welfare state is very heavily financed on a pay-as-you-go basis. A large part of the population therefore sees no reason at all to build up assets – for example for old-age provision. Many rely on the pay-as-you-go pension system and welfare state. That is why too little wealth is built up in Germany. It’s different in Italy, for example. Real estate ownership is much more widespread there than here.

But isn’t it rather the case that many people don’t even have the opportunity to accumulate wealth?

That comes with it. Employees pay significant contributions to fund the pay-as-you-go pension system. Then there is not much left for the capital-covered old-age provision.

The French economist and left-wing pioneer Thomas Piketty has suggested that all 25-year-olds should receive start-up capital of 120,000 euros from the state – as an “inheritance for everyone”. What do you think about this idea?

I’m skeptical. Such a “basic inheritance” – which other economists also propose again and again – ultimately ensures moralization and paternalism by the state. Because behind the idea is that the money has to be invested sensibly, for example in training. So then you have to prove that you’re doing something with the money that other people think is appropriate. In addition, the state has much more useful levers in its hands to ensure opportunities for advancement: an excellent school and university system would be an example. Shouldn’t we rather invest there than simply redistribute? I think it’s much better to also enable lower income groups to build up wealth over the course of their working lives, which they will not only benefit from in old age, but from which they can also leave something behind.

Jan ganger spoke with Jan Schnellenbach

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