Shifting the Tax Burden away from Labour towards Inheritances and Gifts – Simulation results for Germany

Andreas Thiemann (), Diana Ognyanova (), Edlira Narazani, Balazs Palvolgyi (), Athena Kalyva () and Alexander Leodolter ()
Additional contact information
Diana Ognyanova: European Commission – DG ECFIN
Balazs Palvolgyi: European Commission - DG ECFIN
Athena Kalyva: Greek Ministry of Finance
Alexander Leodolter: European Commission – DG ECFIN

No 2021-16, JRC Working Papers on Taxation & Structural Reforms from Joint Research Centre

Abstract: Germany’s tax system places a relatively strong emphasis on direct taxes, particularly on labour. At the same time, revenues from the inheritance and gift tax are relatively low. This points towards a large-scale transfer of wealth from one generation to the next that is largely untaxed and thereby maintaining the high degree of wealth inequality observed in Germany. This is due mainly to the wide-ranging tax exemptions for business assets, which make the system complex, inefficient and regressive. This paper presents three hypothetical budget-neutral scenarios of broadening the inheritance and gift tax base while reducing the tax burden on labour income. Keeping the current progressive rates but abolishing tax exemptions would lead to about EUR 9-12 billion additional annual inheritance and gift tax revenue. Replacing the current tax regime by a flat rate of 10% or 15% could yield about EUR 0.5-2.3 billion or EUR 4-6.5 billion. Using EUROMOD, the microsimulation model of the EU, we show that these additional revenues could be used to reduce the tax burden on labour, which would improve income equality. Furthermore, estimations of labour supply responses to these reforms, based on the EUROLAB labour supply model, indicate that lowering the tax burden on labour may also lead to a slight increase in labour supply in particular for low-income earners.

Keywords: tax shift; inheritance and gift tax; tax wedge on labour; wealth inequality. (search for similar items in EconPapers)
JEL-codes: D31 H2 J2 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-12
New Economics Papers: this item is included in nep-cmp, nep-eur, nep-lma, nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ipt:taxref:202116

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