Why a Wealth Tax Won't Fix Germany's Budget

Suppose that instead of taxing the wealthy, Germany simply took what they had. Not a levy or a surcharge, but the whole of it: the entire net worth of the wealthiest one percent of the country, expropriated in a single day and moved into the treasury. It would come to somewhere around €4.5 trillion, though a good chunk of that is locked up in companies and real estate¹ that cannot be turned into money without selling them, and at that scale the only available buyers are mostly one another. Set the €4.5 trillion against what the German welfare state actually costs, which is about €1.3 trillion a year,² and it would keep the whole system running for a little over three years.

Nobody is proposing this, of course. I start with it because it fixes a ceiling. If seizing everything the rich own outright would fund the country for three years, then a wealth tax, which takes a thin slice of that same wealth each year rather than all of it at once, has to raise dramatically less. The careful estimate is somewhere between €10 and €25 billion a year.³ The most aggressive proposal anyone has actually put on the table, from the party Die Linke (The Left), might bring in around €100 billion⁴ in a good year, and probably less once people rearrange their affairs to avoid it.

Those are not trivial sums, but the thing they are meant to fix is not a fixed sum either. The subsidy the federal government pays into the pension system, simply to keep it solvent, is already past €116 billion a year.⁵ It is the single largest item in the budget, larger than defence, and it climbs by another €5 or €6 billion every year on its own. A realistic wealth tax, €10 to €25 billion, would not cover that one programme, never mind the rest of the welfare state behind it, another €1.1 trillion a year. And since that climb comes whatever else we do, a good part of the tax’s entire yield would be swallowed just holding the pension line in place. This is the part I often see missing from the debate. A wealth tax can raise a recurring sum, but that sum grows far more slowly than the obligations it is meant to absorb. In 2024 alone, social spending rose by more than €80 billion,² several times what such taxes would bring in.

I should be clear that I am not against taxing wealth. I think we should tax inherited fortunes considerably harder than we do, and I will come to how. My objection here is narrower, and it is a matter of arithmetic rather than social justice, fairness, or redistribution. The story the populist left keeps telling us, that the country’s problems are really a problem of distribution, that somewhere above us sits a layer of people whose money would close the gap if only we had the nerve to take it, does not survive being added up. There is less available at the top than people imagine, and reaching harder for it tends to leave less.

None of this touches the other case for taxing wealth. Many of the people who want a wealth tax are not really arguing about the budget. They want to narrow the distance between top and bottom, or to keep fortunes from compounding across generations into dynasties. I am not arguing against them here. My claim is only that closing the fiscal gap is a different task, and that wealth taxes are poorly matched to the scale and shape of this one. You can buy the whole case for redistribution (which I definitely don’t) and still find that the money is not there.

What I am really arguing with is the shape the debate has taken here. In the German press, the answer to every gap in the budget is the same one: tax high earners more, tax wealth more, raise the top rate again. The other side of this barely comes up. We keep finding room for new entitlements, the latest a further expansion of the Mütterrente, the recent state top-up to pensions.⁶ The question of what we might stop paying for is treated as not quite respectable. Reaching for higher taxes on the wealthy has become a way to avoid that question rather than to answer it.

It helps to know that this is not a lightly taxed country to begin with. Germany takes a larger share of national income in tax and social contributions⁷ than almost any other rich country, and the burden falls steeply on the people at the top: the best-paid tenth already provide more than half of all income tax,⁸ and the best-paid one percent more than a fifth of it on their own. When people say the rich should pay their fair share, they are for the most part describing the country they already live in. So the real question is not whether the wealthy pay, but whether asking them for still more would change anything that lasts. I don’t think it would, for two reasons. The first is the shortfall I have just described. The second is that even the money you could raise, you would have trouble keeping.

High earners and large fortunes are unusually mobile, and the base for a wealth tax is both small and concentrated, so when even a handful of the largest fortunes leave, a disproportionate share of the revenue leaves with them. This is one of the more consistent findings in the whole literature. Twelve rich countries had an annual wealth tax in 1990, and four still did by 2017.⁹ The rest gave theirs up, almost always for the same cluster of reasons: the rich move, illiquid assets are hard to value, and the revenue never matches the forecast. France ran a wealth tax for three decades, watched a slow outflow of capital and people, and in 2018 replaced it with a tax on real estate, the one asset that cannot follow its owner abroad. When Norway raised its wealth tax by a fraction of a point in 2022, dozens of its richest left for Switzerland¹⁰ within the year. Even just announcing the possibility of a wealth tax just made $1 trillion of assets move out of California.¹¹

Germany has half-absorbed this lesson already, because it taxes not only wealth but the act of leaving. If you hold a large stake in a company and give up your residence here, the state treats your departure as though you had sold the company on the way out and taxes you on a gain you have not actually made. This kind of tax has a long and unhappy history in Germany. The first of them, the Reichsfluchtsteuer, was introduced in 1931 to slow the flight of capital during the Depression, and after 1933 the Nazi state lowered its thresholds and used it, among other instruments, to help strip fleeing Jews of their property. I am not suggesting the modern exit tax resembles that in purpose or in effect. It is an ordinary piece of tax law, supported by the European courts. But when stopping people from leaving becomes a larger and larger part of how a country taxes them, it is usually a sign that something has gone wrong with the reasons they had to stay.

Then there is the thing the money is actually needed for. Germany is growing old, and no rate on any fortune changes that. For every 100 people of working age there are about 33 of retirement age today,¹² and on the current projections there will be between 43 and 61 by 2070, with the working population shrinking in every variant of the forecast and no plausible level of immigration able to offset it at the speed we manage to bring newcomers into work. That single demographic fact is what drives the pension subsidy, and the pension subsidy is becoming one of the dominant forces shaping the budget. Health and long-term care sit on the same curve, and are heading the same way for the same reason.

Immigration is the obvious answer to an ageing country, and in the long run it may be part of one. But its fiscal effect arrives slowly, too slowly to offset the demographic decline on the schedule the budget runs on. A refugee cohort in particular tends to be a net cost for the better part of a decade before it even turns positive, if it turns at all.¹³ The people who arrived in 2015 took close to ten years to reach an employment rate of about two-thirds.¹⁴ The contribution arrives, but it arrives very late.

If the argument ended there it would amount to a case for doing nothing, which is not what I believe. There is a way to tax the wealthy that is both fair and genuinely hard to escape, but it is not a tax on holding wealth. It is a tax on passing it on. The way we tax inheritance now is close to the reverse of fair. An ordinary heir, someone who inherits a house and a small practice, pays the full schedule, which runs up to about a third. The largest fortunes in the country, the great family firms worth tens or hundreds of millions, pass at an effective rate of around two percent,¹⁵ not through anything illegal but through a set of exemptions written precisely for them.

The exemptions are not as senseless as that makes them sound. A company is not a bank balance, and an heir handed a 30% bill on a firm worth €100 million may have no way to pay it except by selling the firm, or carving a piece off and handing it to whoever has the cash. A tax that forces working businesses to be broken up in order to collect it is a genuinely bad tax, and the fear of doing exactly that is the honest reason the exemptions exist. The trouble is that we answered a real problem in the laziest way available, by mostly not collecting the tax at all.

There is a better answer, and I believe it is not complicated. Rather than demand the cash, the state can take its share of a large inheritance in shares. When a big firm changes hands, the tax owed is converted into a second class of stock, which the state holds but which carries no vote and no say in how the company is run. The heir is given a long stretch of time, say twenty years, to buy those shares back out of the profits the business throws off, at a pace many healthy firms could manage without selling anything real.

If the heir does that, the state’s stake gradually disappears and the company is wholly theirs. If they do not, then at the end of the period the dormant shares convert into ordinary voting stock and are listed on the open market, where anyone, a competitor included, is free to buy them. And if at any point the heir tries to dodge the whole arrangement by selling the company early, the full tax falls due at once. So an heir who keeps the firm and runs it well pays the state slowly and gives up nothing they were using, while an heir who would rather take the money pays in full and immediately. The only person who actually loses control of a company is one who refuses, across twenty years, to pay anything toward what they were handed. No working business has to be broken up to satisfy the tax office, and no large fortune passes untaxed merely because breaking it up would have been the wrong thing to do.

The mechanics would need work, and I am not claiming this exact design is finished. Some firms are too cyclical for a fixed schedule and would need deferrals, or repayments tied to the years they actually make money. The competitor buying converted shares is the part that would draw the most fire, and might need limits, I still believe it’s the core motivating factor to pay the tax, however. But my point is smaller than the scheme. Liquidity is a solvable problem, and a blanket exemption does not solve it, it just gives up on the question.

It is worth noticing, too, who actually bears this tax. People inherit late. The typical German heir is already in their fifties or sixties,¹⁶ and often retired, because we now live long enough that an inheritance usually arrives about the time the person receiving it has stopped working. This is money reaching someone who has already built a life without it, rather than bread taken from a child. It is unearned, and it changes hands at the one moment when the person who owned it can no longer arrange to be somewhere else, since they are dead. Closing the exemptions, even without the mechanism I have described, would raise something like €8 billion a year.¹⁷ Against a hole this size that is not a rescue, and an inheritance tax saves the budget no more than a wealth tax does. The case for it was never that it balances the books. It is that the money is lightly taxed and hard to avoid, and that it could pay for something durable instead of disappearing into the annual gap, say about half the cost of opening a small investment account for every German child at birth¹⁸ and letting it grow until they retire. That is what I would do with it.

The appeal of the populist story is easy to understand. If the gap in the budget is simply the rich declining to pay, then closing it costs the rest of us nothing but the resolve to make them, and the villain is conveniently somebody else. That is one reason the argument stays so attractive, and also why it keeps failing. You could take everything the wealthiest one percent own and run the country on it for three years, or tax their wealth every year at the most aggressive rate anyone has seriously proposed and still fall short of the pension bill alone, while some part of the base quietly moved abroad. Meanwhile the cost of an ageing population goes on climbing, the health and care bills climb with it, and the fiscal cost of immigration arrives years after the decisions behind it. None of those things answers to the top rate of tax.

Taxing the rich harder is not, in the end, a policy for any of them. It is a comforting illusion that spares Germans from the one conversation we actually need to have: admitting that the welfare state we built hasn’t been affordable for a long time, often sets wrong incentives, and that it’s time for us to decide what we must let go.

Discussion on HackerNews

1. Wieso ist das Vermögen in Deutschland so ungleich verteilt?, Bundeszentrale für politische Bildung. ↩︎

2. Sozialbudget 2024, Bundesministerium für Arbeit und Soziales. The total was €1,345 billion, 31.2% of GDP. ↩︎ ↩︎²

3. The DIW’s Stefan Bach who has spent more time costing a German wealth tax than anyone alive and is sympathetic to the idea. ↩︎

4. Vermögensteuer Die Linke: Aufkommens- und Verteilungswirkungen, DIW Berlin, 2026. The model gives about €147 billion on paper, falling to roughly €100 billion once behavioural responses are allowed for. ↩︎

5. Bundesmittel für die Rentenversicherung, Deutscher Bundestag. ↩︎

6. The governing coalition has agreed a further expansion of the Mütterrente from 2027. This adds €5 billion a year to pension spending: Die Mütterrente und ihre Kosten, ZEIT. ↩︎

7. Revenue Statistics 2024: Germany, OECD. Germany’s tax-to-GDP ratio was 38.0% in 2024, against an OECD average of 34.1%. ↩︎

8. Einkommensteueranteile, Bundeszentrale für politische Bildung. ↩︎

9. The Role and Design of Net Wealth Taxes in the OECD, OECD, 2018. ↩︎

10. Wealthy Norwegians flee to Switzerland to evade high wealth taxes, Fortune, April 2024. ↩︎

11. California’s 2026 ballot initiative proposes a one-time 5% tax on residents worth over $1 billion, due in 2027 and retroactive to anyone living in the state on 1 January 2026. The tax escape map: Billionaires are bolting for Florida from the West Coast, Fortune, 2026. ↩︎

12. 16. koordinierte Bevölkerungsvorausberechnung, Statistisches Bundesamt, 2025. ↩︎

13. Humanitarian migrants impose a net fiscal cost in the short run and take far longer than labour migrants to turn positive, because the net contribution tracks employment and earnings, which start low: OECD, Economic impact of migration. On timing, the average refugee in the United States becomes a net contributor about eight years after arrival (Center for Global Development), and European cohorts take a comparable span to approach parity. ↩︎

14. 10 Jahre Fluchtmigration: Beschäftigungsquote von Geflüchteten nähert sich dem Durchschnitt an, Institut für Arbeitsmarkt- und Berufsforschung, 2025. The 2015 cohort reached 64% after nine years. ↩︎

15. Neue Zahlen zu Erbschaftsteuerprivilegien: 3,4 Milliarden Euro Steuererlass für 45 Großerben, Netzwerk Steuergerechtigkeit, 2025. ↩︎

16. Erben in Deutschland, Deutsches Institut für Altersvorsorge / empirica. ↩︎

17. Erbschaftsteuerreform: Vergünstigungen abbauen, Freibeträge erhöhen, Steuertarifstufen reduzieren, DIW Berlin, 2026. Abolishing the business exemptions raises about €7.8 billion a year. ↩︎

18. I make the fuller case for this in The Baby Fund. ↩︎