07 February 2023
09 September 2022
Every EU citizen should inherit 120,000 euros on their 25th birthday, says economist Thomas Piketty. That’s how he envisions the path to a more socially just world in his book Capital and Ideologyhttps://www.brandeins.de/magazine/brand-eins-wirtschaftsmagazin/2020/neuer-generationenvertrag/erbschaft-fuer-alle (Accessed: 23 January 2023). According to his calculations, the model could be financed through higher capital gains taxes from the richest members of society. And it could be achieved within his lifetime, he claims. But the real world looks a bit different.
Inheritances are taxed at a relatively low rate in Germany, and Austria completely abolished its inheritance tax in 2008. The past fifty years have been the most prosperous and economically stable period in both countries’ histories. And in both countries, academics and workers’ associations are observing the same mechanism: “Wealth is not being determined by performance but by birth.”https://ooe.arbeiterkammer.at/interessenvertretung/verteilungsgerechtigkeit/vermoegen/Reichtum_wird_vererbt.html (Accessed: 23 January 2023) In Austria as in Germany, according to a study by the Johannes Kepler University in Linz, one can see that those who inherit a large amount pay very little tax, whereas those who earn very little and do not receive an inheritance pay proportionately higher taxes. In Austria, according to the study, the richest one percent of private households, with 534 billion euros in net wealth, have 40.5 percent of the total wealth in the country. Unequal starting conditions are passed on from one generation to the next.
“Those who have will receive” sums up the situation, says sociologist Claudia Vogel. She researches inheritances and their impact on social inequality at the German Centre of Gerontology (DZA) in Berlin. “Only the top ten percent have the kind of assets we would call wealth. And only those in that top ten percent have a chance of receiving an inheritance,” she says. The lower half of the German population has very few possessions and might only inherit a television set or a small sum of money. People in the lowest 25 percent are so deep in debt that their relatives cannot expect an inheritance or have to reject it. In Germany, as in Austria, anyone who inherits debt can decline their inheritance within six weeks.
“Only the top ten percent have the kind of assets we would call wealth. And only those in that top ten percent have a chance of receiving an inheritance.”
Instead of wealth being distributed to more and more people from one generation to the next, it becomes more concentrated such that the gap between rich and poor widens. Inheritances have therefore always driven inequality in capitalist societies. What has changed over the generations is how and, above all, when inheritances are transferred.
War children – inheritances provide for retirement
After the Second World War, Marie’sThe name has been changed, but it is known to the editors. grandfather began an apprenticeship as a craftsman, through which he would later build a small empire. He became an architect, the first in the family, and designed savings banks and town halls for medium-sized towns in Bavaria. He also renovated the family home, a nearly worthless old railway shed at the time. For many men in the generation born during the war, with the post-war economic miracle at their backs, “working their way up” was a chance to secure a better life for future generations. Marie’s grandparents had five children – two sons and three daughters. Marie’s mother was one of them. Her grandfather worked hard. At the end of this life of hard work, his heirs were left with twelve hectares of land, several buildings, a small trout pond and a sum of several million euros.
Sociologist Claudia Vogel uses the term “testator” to refer to anyone who leaves an inheritance upon their death. By inheritance, she means money and the value of any real estate. According to her, the decisive factor in the accumulation of wealth is not necessarily the amount of an inheritance but how it is distributed. When there are two parents and two children, inheritances do not get much smaller. In addition, children of wealthy parents accumulate more capital of their own during their lifetime than do children of poor parents. Children with rich parents receive a better education, earn more money and invest in more real estate at an earlier age. So when they receive their inheritance, they are usually wealthy already. In sociology, this is called absolute inequality.https://www.diw.de/de/diw_01.c.809874.de/publikationen/wochenberichte/2021_05_2/die_absolute_ungleichheit_steigt_durch_erbschaften_und_schenkungen__interview.html (Accessed: 23 January 2023) Gender has stopped playing a role in inheritances during the last twenty years, a recent study by Ms Vogel at the University of Applied Sciences in Neubrandenburg, Germany, shows.
According to sociologist Claudia Vogel, the decisive factor in the accumulation of wealth is not necessarily the amount of an inheritance but how it is distributed.
In Marie’s family, this paradigm shift had not yet taken place when her grandfather’s estate was divided. She says her grandpa always treated all the children equally. But that did not stop the men and women in the family from fighting over the estate, she adds. The female heirs ended up with much less than the male heirs. One of her uncles took over the architectural firm. As if by a law of nature, the house where Marie grew up went to her male cousin. Her aunts only received a small amount of money. The family had been very close before, says Marie. But arguing over the inheritance shattered their bond. “The money broke up the family to a certain extent,” she says in retrospect.
Baby boomers – inheriting then paying off their debt
The baby boomer generation was the first generation of Germans since the Second World War to be largely spared crises and wars in Europe. They were born into the post-war economic miracle and were in the prime of life during the period of stability that followed. And they were already near retirement when the 2008 financial crisis and the Covid pandemic afflicted subsequent generations. They were able not only to maintain their parents’ fortunes but grow them.
A study by Ms Vogel shows that seven percent of Germans received an inheritance between 2002 and 2015. The study gives a median value of 31,000 euros, which means at least half of boomer heirs received that amount or more. Five percent of the group inherited about 400,000 euros or more. Marie’s family thus belongs to the upper segment of heirs in Germany. However, she does not belong to the top 10,000 heirs, which inherit so much that they set up foundations. Most boomers receive their inheritance after they retire or shortly before. Fifteen percent have not paid off their properties by that point, according to Vogel. “The number of people who retire with debt is on the rise,” she notes. There is also a significant divide between eastern and western Germany. In the east, generation intervals are much shorter but inheritances are much smaller. Boomers there did not have much of a chance to accumulate wealth across the generations because of collectivisation and subsequent decollectivisation. The average inheritance is 52,000 euros in the eastern part of the country and 92,000 euros in the western part.
“The number of people who retire with debt is on the rise.”
Marie’s mother does not want to be wealthy. She lives alone and does not need much to be satisfied, says Marie. “My mother was fed up with this inheritance business.” She gave a portion of what she received, just under 100,000 euros, to Marie while she was alive. Gifts of up to 400,000 euros to biological children are tax-free in Germany. This is a uniquely German tool for passing on assets during one’s lifetime and reducing tax liabilities, says Ms Vogel. If you look at the demographic shift in Europe, this makes perfect sense. After all, Europeans are living longer than ever before. Millennials like Marie inherit much later than their parents’ generation did.
Millennials – gifts are a last resort
European millennials are expected to inherit around 2.6 trillion euros in the coming years, according to an article in German business newspaper Handelsblatt.https://veranstaltungen.handelsblatt.com/bankengipfel/das-grosse-erben-wer-unterstuetzt-die-millenium-generation/ (Accessed: 23 January 2023) As the article states, “financial service providers need to learn to speak the language of millennials and Generation Z and understand their financial priorities.” That begs the question: What are their priorities? Unlike their parents, millennials have experienced multiple crises during their careers – the 2008 financial crisis, the Covid-19 pandemic and now the war in Ukraine. Property prices have skyrocketed, permanent jobs are no longer a given, and traditional careers are on the decline. Millennials are accumulating less capital than the generation before them – which makes inheritances all the more important. Millennials are more dependent on financial support from parents and grandparents than any previous generation.
Millennials are accumulating less capital than the generation before them – which makes inheritances all the more important. Millennials are more dependent on financial support from parents and grandparents than any previous generation.
Although the economic situation of a child’s parents does not determine that child’s career path as strongly as it used to, it remains true that children of parents who did not go to university are far less likely to go to university than children of parents who did go to university. Those at the lower end of the socioeconomic spectrum that inherit something now usually inherit debt. Parents who die early often have not paid off their properties or businesses. People who inherit at a relatively young age, like Marie, are a special case. Marie shows she is aware of this. She says, “I’m very happy that my mother is taking a new approach and is not putting conditions on the inheritance.” Marie is an only child and now has a family of her own. “In the beginning I said, okay mum, I’ll invest in something that will be our own, like a house,” she recalls. But then memories of the quarrel in the family, mourning over her grandparents’ old house and all the unpleasant feelings surrounding the inheritance gave her a new idea. She and her partner now want to buy and upgrade a living van and join an intentional community. She might even leave the van to her children one day. But most of all, they hope to be flexible and ready in these uncertain times. “We also want to get away from this rigid form of ownership – it can really make you sick.” Her mother supports the idea.
What to do about inequality?
Around one million people died in Germany in 2021. “Half of them had no assets at all, except for maybe a car or a TV,” says Ms Vogel. “The few thousand euros in the account they leave behind is just enough to pay for their funeral.” And yet more fortunate Germans inherited 50.2 billion euros and donated 34.2 billion euros in 2020. That is more than twice as much as ten years before.https://www.destatis.de/DE/Presse/Pressemitteilungen/2021/08/PD21_403_736.html (Accessed: 23 January 2023) “There is an insane amount of wealth, but because it is so unequally distributed, the vast majority of people either inherit nothing or only a very small amount,” she adds. The wealth gap has tripled since 2012.https://www.diw.de/de/diw_01.c.809832.de/publikationen/wochenberichte/2021_05_1/haelfte_aller_erbschaften_und_schenkungen_geht_an_die_reichsten_zehn_prozent_aller_beguenstigten.html (Accessed: 23 January 2023) That means a small number of people in society are receiving larger and larger inheritances with each generation, while most people are receiving small inheritances that can hardly even be called wealth. The study by the Johannes Kepler University Linz came to the same conclusion for Austria: “Inheritances and gifts make the largest contribution to inequality in gross wealth in Austria. Specifically, 38.4 percent of the measured dispersion of wealth can be attributed to this.”
“There is an insane amount of wealth, but because it is so unequally distributed, the vast majority of people either inherit nothing or only a very small amount.”
Ms Vogel sees order of inheritance as one way to remove this type of inequality. “The idea that people need to be biologically related to inherit tax-free is very archaic.” She believes that tax-free amounts should increase, including for patchwork and elective families, and that very large inheritances of 400,000 euros and above should be taxed more heavily. In Austria, where the inheritance tax has been completely abolished, the Chamber of Labour has proposed a similar model. After all, an exemption for one million euros would only affect four to five percent of households in Austria, it says. That is the only group of households that has a high net worth averaging one million euros or more.
Ideas for taxing inheritances are at least as numerous as their opponents. To name just a few: In his book Inherited Wealth, sociologist Jens Beckert suggests transferring inheritances to income tax and treating them like income – with tax rates of up to 45 percent. Sociologist Steffen Mau goes even further with this model by calling for revenue received from a higher inheritance tax rate to be distributed as a “social inheritance” to people at age 18 who do not receive an inheritance.http://library.fes.de/pdf-files/wiso/11658.pdf (Accessed: 23 January 2023)
The myth that the economy suffers from such taxation is refuted on the one hand by examples from European countries like France. On the other hand, it is put to the test by economist Thomas Piketty’s simulation. “From 1950 to 1980, high income, wealth and inheritances were taxed so heavily that inequality declined. At the same time, growth accelerated. So it’s not a burden on the economy if the rich have to contribute their share.” Moreover, if every citizen was to receive an inheritance financed by taxes, it would drive entrepreneurship and innovation. More people would have a chance to realise their economic potential and subsequently invest. And that would ultimately benefit everyone.
Original in German. First published in the #02/2022 (June) issue of period.
Translated into English by Douglas Fox.
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