The half-division principle was formulated in 1995 by a judge of the Federal Constitutional Court (BVerfG) as a comment on a judgment on the constitutionality of property tax. For about ten years, the policy adhered to this principle, which roughly states that taxes can amount to a maximum of half of a tax base. In 2006, however, other judges at the BVerfG revised the half-division principle again, because the restriction of taxation to 50 % can in no way be derived 1:1 from the Basic Law. Nevertheless, the myth of the half-division principle persists in wide political circles and in the public discussion about taxes in this country.

1st Half Division Principle – Introduction

As a rule, our readers are interested in how they can optimize their money for tax purposes. Whether you earn the money as a sole proprietor or get transferred as an inheritance is basically irrelevant. In any case, everyone can put themselves in this initial situation, because of what you receive, you want to use as much as possible according to your own ideas in the end. Some save on the purchase of a house, others finance a dream vacation, others build a fortune for their children.

Of course, in this context, the question of how large the tax share on income or asset accruals is of crucial importance. If the income tax on an annual profit of EUR 1 million is about 50%, you can lead an upscale lifestyle, but have to wait a little longer until you can fulfill the dream of a villa on the Côte d’Azur. If, on the other hand, the tax rate were only 25%, you could at least console yourself with the purchase of a new Porsche.

Nowadays you may complain that Germany is a high-tax country, at least compared to other countries, such as the UAE. However, if you look into the history of the German income tax or the inheritance and gift tax, you realize that earlier was taxed higher. In addition, there was also a property tax in the past. In the 1990s, all this had led to the formulation of a principle on the part of the BVerfG, which was to limit the amount of taxation in Germany. We are talking about the so-called half-division principle.

2nd half division principle – what is it?

The half-division principle developed by the BVerfG states that limits are imposed on the state when taxing its tax subjects. More specifically, this limit should be 50 % of the respective tax base. No one should have to pay the state more than half in taxes. No one should thus be left with less than half of the income or wealth growth that has flowed in. The idea of the judges at the BVerfG was therefore that the half-division principle serves as a guarantor for Article 14 GG. Article 14 of the GG stipulates that, in the relationship between the State and the taxable person, the property of the latter enjoys special protection. The background is that more or less arbitrary expropriation should be excluded. When the protection of property was enshrined in the Basic Law, the legislature was still under the impression of the domination of the Third Reich.

3. How did the BVerfG arrive at the half-division principle?

The half-division principle is closely related to a dispute over wealth tax in relation to its origin. In 1995, the BVerfG ruled on a lawsuit in which taxpayers who were to pay property tax on company values, for example, found themselves at a disadvantage compared with those who had to pay tax on real estate values. The reason for this was that the valuation of real estate was carried out according to outdated procedures at that time. This resulted in values as a benchmark which were well below the market value. Consequently, all other assets were taxed at a much higher rate under the property tax. And the BVerfG actually recognized a violation of Article 3 GG, the principle of equal treatment.

The legislature should now have adapted the Property Tax Act to the case law of the BVerfG. Either he would have had to tax real estate higher or tax all other assets on similar terms as with real estate. Both seemed to the then Federal Government but little opportune. In fact, it did not make the necessary adjustments to the Property Tax Act. Without any change, however, the Property Tax Act was unconstitutional from 1997 onwards. Henceforth, the application of this taxation ceased, which in particular caused the federal states to suffer a significant fall in their tax revenues, since the property tax is a mere state tax; However, there was no direct disadvantage to the Bund.

4. How the BVerfG came to the half-division principle

The prominent judge Prof. Paul Kirchhoff was also involved in the judgment of the BVerfG. The interpretation of the Basic Law seemed to him to fall short of the grounds for the judgment. The safeguarding of Article 14 GG with its property protection was particularly important to him. Whether political considerations also played a role in his decision to draft his own comment on the judgment? In any case, he wrote a so-called obiter dictum on the question of protection against excessive taxation. At that time, this guiding principle went down in the history of German tax law as a half-division principle. It provided a strong argument for limiting taxes to a maximum of 50%. One could also say that the authority of its creator showed the legislature the limits in shaping tax law. But others might also think that this was finally the appropriate reason for business liberal circles to always warn against supposedly unconstitutional tax increases.

5. How the BVerfG abandoned the half-division principle

For about ten years, the half-division principle was omnipresent in discussions on possible tax increases. As soon as even the appearance of a tax increase became apparent, potential victims made efforts to relate to the half-division principle. But then a case arose which made the risk of over-taxation more than 50% concrete. This concerned the taxation of a partnership with income tax and business tax, which together comprised about 60% of income. This would be unthinkable today, but at that time it was quite possible, because the crediting of business tax to income tax was only introduced in later years.

Again, the BVerfG should decide whether this taxation was constitutional. The supporters of the principle of half-division naturally expected the judges to finally confirm this principle in their judgment. After all, the question had been dealt with long enough and was also addressed. But to their surprise, the judgment of the BVerfG on the half-division principle was negative.

Thus, the judges could not recognize in any article of the Basic Law a passage that said that taxes should be a maximum of 50%. All that can be read out from the Basic Law is, firstly, that personal property, thus also income or an increase in assets, is protected by law. Secondly, that the state has the right to tax. Thus, the judges found that taxation with 60% of income was lawful in the present case. Finally, the taxable claimants still retained 40% of their income, which, in the opinion of the judges, was sufficient not to constitute expropriation by taxation.

6th half-division principle from the perspective of the BVerfG – Conclusion

A lot of time has passed since the groundbreaking judgment of the judges at the BVerfG on the half-division principle. Nevertheless, the idea persists to this day that the half-division principle is binding for the legislator when setting tax rates. Often this argument is combined with the indication that Germany is a high-tax country. Is this to create the impression of ubiquitous over-taxation? One can hardly resist the impression of a death-stroke argument. For example, this could be observed when considering introducing an over-profit tax.

Fact is, this approach is wrong. It is true, on the other hand, that the legislature may set the level of taxation only so high that the taxpayers still have enough left, so that it is not a so-called throttling tax. However, where exactly the limit of the reasonable tax burden lies, no court has yet found. One can therefore assume that a legal dispute is needed again in order to explore this last limit of tax law.