Tax

Why Entrepreneurs Contemplate Leaving Germany - Commentary

Dr Rainer Zitelmann, 15 June 2021

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Germany holds national elections in September, and opinion polls point towards the ascent of parties that wish to significantly increase taxes on HNW individuals. With other factors to consider, this could encourage an exodus of entrepreneurs, so the author of this article argues.

A regular commentator in these pages is Germany-based real estate investor, entrepreneur and author Dr Rainer Zitelmann. An outspoken defender of free enterprise and critic of what he regards as misguided attacks on wealth, Dr Zitelmann isn’t afraid to probe attitudes that sometimes don’t receive the attention they deserve. (See examples here and here.)

Germany is, as chronicled by this news service some years ago, one of the under-appreciated powerhouses of wealth management. But according to the author, the fabric of this market is starting to fray because of what he sees as an exodus of entrepreneurial talent. This is a concern that private banks, wealth managers and family office professionals should consider. 

As ever, while the editors of this news service are pleased to share views of guest writers, we don’t necessarily endorse all views, and invite responses. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

I know a young man (22) who has been earning money as an entrepreneur since he was 15 years old. Rather than going to university, he founded a successful company. Now he wants to emigrate. “In Germany, you are more likely to be envied than appreciated. I’m going to leave the country,” he explained to me. He is very successful in social media and has travelled widely. Some of his friends have already emigrated to Dubai and he is now weighing up whether to join them or head for Singapore instead. Another friend of mine is a serial entrepreneur and has founded eight companies, and created lots of jobs in the process: “If a leftist government is elected on 26 September 2021, I will definitely emigrate.” Like many, he is afraid that the general election in September could result in a majority for Germany’s three major left-wing parties, the Greens, the SPD and Die Linke. According to the latest polls, these three parties could well gain enough votes to form a government.

Almost no one in my circle of acquaintances is not thinking along these lines. Another friend of mine, a successful lawyer, has already taken the precaution of buying a house in Thailand and is also considering emigrating. One has already packed his bags and moved to Italy, which is luring wealthy people with a flat tax of €100,000 ($121,652) a year. 

I started doing my research several years ago and even bought an apartment in Manhattan. I’ve also thought about moving to London, Singapore or Switzerland – or even Vietnam. After all, although Vietnam calls itself a communist country, it actually has a lower ratio of government expenditure to gross national product (29 per cent) than the US (35 per cent) or Germany (45 per cent). Moreover, the population is more admiring of the successful than envious. But - despite its faults - I love my country. That’s why I still live in Germany. However, if my fellow Germans were to elect a left-wing government on 26 September 2021, that would definitely cross a red line for me, too.

It’s not just about taxes
Of course, the fact that so many entrepreneurs are thinking about emigrating is, at least in part, related to the threat of tax increases for high earners and the wealthy. Each of Germany’s three main left-wing parties has proclaimed that they want to reintroduce a wealth tax and significantly increase income tax rates. In addition, they are planning to levy a one-off wealth tax. 

But the entrepreneurs I talk to are not just concerned about taxes. They feel the same as entrepreneurs did in Sweden in the 1970s. Back then, the German writer Hans Magnus Enzensberger wrote the following about Sweden: “In such a society, it would appear, the rich have little to laugh about. Yes, if only it were just the taxes! As decent citizens, they want to pay their taxes punctually, if reluctantly. What offends them more is the fact that no one seems to understand their lot.” Sweden’s wealthiest citizens felt “superfluous, disregarded and excluded,” explained Enzensberger. In response to such treatment, there was an exodus of wealthy people from Sweden – Ikea founder Ingvar Kamprad is just one example. 

And this is precisely how many entrepreneurs and wealthy people in Germany feel today. And it is not just a subjective feeling. I commissioned the Allensbach Institute and Ipsos MORI to conduct an international survey into popular attitudes towards the rich. The first round of surveys included Germany, the US, France and Great Britain, followed by Sweden, Italy and Spain. Among my findings, which will be published in the journal Economic Affairs in June: France is the only country in which social envy is even more pronounced than Germany.

A fiscal wall
But is emigration the answer? In the early 1960s, East Germany built a wall to stem the flow of emigrants (many of whom were self-employed and entrepreneurs) from East to West. Today, the German government is erecting ever higher fiscal walls to achieve the same goal. Under current tax law, anyone who owns a limited liability company or shares in a company and decides to permanently leave the country must pay tax on the capital gain at a rate of about 28.5 per cent. One can only assume that further increases are planned. 

But that is by no means all. Last year, the trade union-affiliated German Institute for Economic Research (DIW) proposed a perfidious plan: In addition to more general tax hikes, the institute also called for a wealth tax on the top one per cent of the population. Anyone with net assets of at least €2.5 million would be subject to the levy. According to the DIW’s calculations, this group owns around €3.5 trillion of assets. After deductibles, this would leave an assessment base of around €2.5 trillion. Even allowing for substantial tax allowances and concessions for business assets, the DIW calculates that the wealth tax would generate more than €10 billion for each percentage point. So, if the levy were to be set at ten per cent, it would raise over €100 billion. And at 20 per cent, that would equate to more than €200 billion.

The value of each individual’s assets would be determined only once, for example on a certain date in the recent past, and the sum due to be paid would also only be determined once. However, payments would then be stretched over an extended period of between 15 and 20 years. The DIW sees the one-time levy and staggered payment model as a way of preventing wealthy people from evading the tax by relocating their domicile: “It wouldn’t help them if they moved their residence abroad, gave away assets or employed other tax minimisation strategies,” is how the DIW explained their proposal. A fiscal wall for the rich, so to speak, to add to the current exit tax. The Greens, currently the strongest party in Germany according to the latest polls, are also demanding that taxation in Germany should no longer be based on tax residency (de facto a person’s primary residence), but on citizenship – as is the case in the US. In this case, no one would benefit from emigrating, they would have to give up their German citizenship.

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