The history of wealth tax in Germany is marked by a contrast. In the early days of the Federal Republic of Germany, the property tax remained unchanged for many years. It was not until 1974 that a first new edition took place. Reforms and adjustments steadily increased from then on. But since 1997, the wealth tax in Germany has been suspended, which represents a decisive turning point in its history. The reason for this was a judgment of the Federal Constitutional Court (BVerfG). There it was found that the collection of property tax is incompatible with the Basic Law. But instead of correcting the Wealth Tax Act and the Valuation Act within the deadline given by the court until the end of 1996, the then federal government refrained from any serious attempt. Since then, you have not paid any property tax in Germany.

1st History of Wealth Tax in Germany – Introduction

In the last Bundestag election in 2021 for the 20th Bundestag, one topic was particularly relevant in election programs of various parties: the wealth tax. Nowadays, no one pays property tax in Germany. But yes, at some point it must have existed. But when exactly had it been abolished? And what was the reason for this?

All this and many more are probably scraps of thought that come to mind when you start thinking about the wealth tax. But if you are seriously looking for answers, you should look at the whole history of wealth tax in Germany. Or even signs. We will gladly take you with us now and look together with you at a time when the wealth tax was a generally recognized tax in Germany, a status, but after a long time it finally had to lose.

2nd history of wealth tax in Germany: the beginnings

Property tax enters the stage of German tax law for the first time in 1895. At that time, Prussia introduced the so-called Supplementary Tax Act. And already in 1913 and 1918 Father Staats demanded an additional, one-off property levy to strengthen the military force – throughout Germany.

After the First World War, the need for financial resources on the part of the young republic was so great that a one-off property levy was raised again – this time as a so-called Reichsnotopfer. But already in 1922, a general property tax according to the Prussian model was introduced throughout Germany. With various interim adjustments, the corresponding law remained in force until 1952.

History of wealth tax: the new wealth tax 1952

The still young Federal Republic of Germany decided in 1952 to reform the property tax and the Valuation Act. For this purpose, a new wealth tax law (VStG) was adopted. Thus begins the history of wealth tax in Germany in the post-war period.

Even then, an unlimited tax liability was distinguished from a limited tax liability, whereby here too, as generally in Germany, the world income principle was applied (even if existing assets were taxed instead of income). At that time, the taxable assets included, among other things, the total assets of natural persons (only domestic assets in the case of limited tax liability) and the assets of corporations. Among other things, a distinction was made between Aktiengesellschaft (AG) and GmbH. As a general rule, a minimum taxable asset was applied to corporations. For example, an AG was based on a minimum assets of DM 50,000. For a GmbH, this was a minimum asset of DM 20,000 (with exceptions). Instead, all other corporations, associations of persons and assets were already the target of property tax (exempt limit) from an actual total assets of DM 10,000. On the other hand, there were exemptions for agricultural cooperatives, non-profit companies, certain banks and parties.

Generally applicable was a tax rate of 0.75%. The taxable assets reduced to full DM 1,000 were used as a basis for assessment. Married couples or a head of household in whose household unrestrictedly taxable children under 18 lived were taxed under the more advantageous co-investment. Furthermore, various allowances were available: DM 10,000 for natural persons, further DM 10,000 for unrestrictedly taxable spouses (if living together permanently), DM 5,000 for each child under 18 years of age. In addition, additional DM 10,000 was granted as an allowance if taxpayers were over 60 years old or if they were disabled for at least three years and the last annual income was a maximum of DM 3,000, but only if the total assets reached a maximum of DM 100,000.

4th Wealth Tax Reform 1974

After more than 20 years, legislators saw a need to revise the Property Tax Act. On the whole, however, the previous regulations were maintained. The main changes concerned the allowances for natural persons and a reduction in the tax rate. Natural persons were now able to claim an allowance of DM 70,000, which doubled when invested together. If a household also included minor children, a further DM 70,000 were added per child. Persons over 60 or those who were considered disabled for at least three years and whose total assets now amounted to a maximum of DM 150,000 (double the amount when assessed together) also benefited from the wealth tax reform. The tax rate has now been reduced to 0.7%. Under certain conditions, this could even be reduced to 0.55 % by the end of 1978 under the provisions of Section 31 of the Equalisation Act.

The most important thing, however, was that the minimum taxation of corporations was now eliminated. However, it remained here with an exemption limit of DM 10,000, which previously applied to other corporations.

Moreover, the legislature added to the list of tax exemptions. In addition, for example, the Deutsche Bahn and the Bundespost. Amendments of this kind should now be made regularly in the event of changes to the property tax law.

5th History of Wealth Tax: Changes from 1978

In 1978 there were again adjustments regarding the property tax. So the legislature lowered the tax rate. However, there has now been a differentiation between natural and legal persons. While corporations still had to expect a tax rate of 0.7%, natural persons could look forward to a reduction to 0.5%.

Further Adjustments to Wealth Tax 1980

Two years later, the legislature raised the exemption for corporate property tax to DM 20,000. Excluded from this were still corporations (AG, GmbH). Also new was the introduction of a lower limit for setting the property tax. Only if the property tax was at least DM 50, the tax offices should be allowed to collect it.

7th Wealth Tax Relief from 1984

In 1978, the legislature granted natural persons a reduction in the tax rate. Six years later, corporations were also able to look forward to a reduction. But only by 0.1 percentage point to 0.6%. Natural persons, on the other hand, could continue to tax their assets at 0.5%.

Another innovation in 1984 was a special scheme regarding limited taxpayers. If it seemed expedient from the economic point of view, either a flat-rate taxation could be carried out or the property tax could even be waived completely. The same was true if the determination of the property tax seemed particularly difficult. This gave the tax authorities a clear margin of discretion.

8. History of wealth tax: recast of the VStG 1985

Only one year later, the VStG was recast. However, there were hardly any significant changes to the previous legislative form. The most important change was a regulation that increased the additional age-related allowance from DM 10,000 to DM 50,000 if the age of the taxable person was at least 65, the total assets were at most DM 150,000 and the taxable person's tax-free claims under § 111 BewG annually added up to DM 4,800.

9. The property tax after reunification

The history of wealth tax in Germany took a whole new turn with the fall of the Berlin Wall. It also fueled the need for action on the part of the legislature in many fiscal terms. Of course, this also affected the property tax, which incidentally also existed in the GDR in its own form. However, the legislature limited itself only to the fact that the collection of property tax in the new federal states was for the time being waived. Strictly speaking, this exception was contained in both § 136 no. 3 and 4 BewG and § 24c VStG. It applied, shortened, but only to those taxpayers who were already resident there, or to companies whose place of management was there. In 1992, the Federal Government extended this derogation. This was repeated in the following years, so that the derogation should expire in 1998. But it should be quite different.

10. History of Wealth Tax: Amendments to the VStG 1995

In 1995, the legislature again introduced a series of amendments to the VStG. For example, it raised the tax rate for natural persons to 1%, which corresponded to a doubling of the previous tax rate. For this, however, a strong increase in the allowance to DM 120,000 (for co-investment DM 240,000) was granted. This allowance was also granted to children within the meaning of the law. Also for taxable senior citizens from 60 or such taxpayers who had to expect a degree of disability of 100% for at least three years, a supplement to the tax allowance was planned, so that this could now rise to a total of DM 170,000.

In the case of property tax paid by corporations, the tax rate remained at 0.6%. Only businesses in agriculture and forestry and other business assets received a small tax gift. Because now their tax rate was only 0.5%.

11. History of Wealth Tax: The Big Bang

11.1. Valuation of assets

Wealth tax is fundamental to the valuation of assets. Therefore, the link to the valuation law is enormous. Logically, the valuation of different types of assets requires different approaches. The valuation of real estate was thus subject to different procedures than, for example, companies. Because real estate increases in value over time, you would actually have to make a new valuation every few years (the so-called main determination of unit values). In fact, the BewG had originally provided for such a requirement. Such a main assessment procedure should take place every six years. But only once, in 1964, was there a general reassessment. Since the administrative burden was very high, an alternative to the ongoing revaluation was introduced, assuming a blanket increase in value. Reunification also meant that even older unit values had to be used in the new federal states.

11.2 Action on property tax before the Federal Constitutional Court

Over time, however, it turned out that real estate with a lower and lower value compared to other assets could be valued in the assessment for property tax. Therefore, there was a complaint with the Federal Constitutional Court, which should decide whether this discrepancy in the taxation of different types of assets is constitutional.

Not surprisingly, the Karlsruhe judges ruled in 1995 that the collection of property tax in its former form violated the principle of equality in the Basic Law (Article 3 (1) GG). For the first time in the history of wealth tax in Germany there was considerable criticism of it. However, this was only about the determination and subsequent collection of the property tax in its previous form. Because by its very nature it was quite constitutional, as also Article 106 paragraph 2 number 1 GG confirmed. Thus, the legislature was asked to adjust the collection of property tax. For this purpose, the judges of the BVerfG set a deadline until the end of 1996.

11.3. Legislative reaction to the BVerfG judgment

Normally, the legislator adheres to the requirements of the BVerfG when it comes to legal corrections to existing laws. But this time he made no attempt. On the one hand, this was due to the fact that at the same time the income tax was increased significantly, so that the abolition of the wealth tax should bring about a compensation (from which, however, only wealthy taxpayers benefited). On the other hand, the wealth tax was a pure country tax. Their abolition thus only reduced the tax revenue of the federal states, while the federal government remained unaffected. Thus, according to the 1998 financial report, the tax loss of the countries due to the abolition of the wealth tax for 1997 alone amounted to DM 9 billion. In addition, the federal government was then CDU-led, the majority of the countries, however, had a government with the SPD at the head. An abolition of the wealth tax could thus weaken the political influence of the SPD.

So it happens that the requirements for collecting property tax continue to exist under the VStG since that time, but no one is subject to collection anymore. In fact, therefore, there has never been an abolition of the wealth tax. The resulting suspension of the collection of property tax is thus unique in the history of tax law in Germany.

12. History of wealth tax in Germany – Conclusion

If you look at the history of wealth tax in Germany (while ignoring the conditions in the GDR), you notice some special features.

On the one hand, it should be clear to today’s critics of the wealth tax that this tax has been part of German tax law since the beginning of the Federal Republic of Germany. It is even enshrined in the Basic Law. On the other hand, its supporters should also be aware that a constitutionally compliant collection of property tax can only be carried out in the long term with considerable administrative effort. Needless to say, this reduces the usefulness of the property tax. As long as the federal states were able to collect the property tax in the unconstitutional form, this was no problem. But if you have to weigh between the administrative burden required and the lost tax revenue, even some supporters are likely to ponder.

It is also striking that the VStG remained unchanged in the first 20 years. It was not until 1974 that the first major changes were made. From then on, the duration in which it remained unchanged decreased more and more, so that in the 1990s practically every year a change in the VStG was introduced. Sure, this also had to do with reunification, but before this trend intensified. Until then with the cessation of the collection of the property tax came the abrupt end.

Nowadays one may argue politically about the so-called reintroduction of the wealth tax. However, the fact that it will regain its old meaning in the foreseeable future can almost certainly be doubted.