The ongoing debate (centred largely in Berlin) about expropriating large German landlords and re-socialising much of the city's housing stock looks as if its has a rocky legal road ahead of it, despite having been approved by a majority of voters in the city-state's recent Senate (Parliament) elections.
Three prominent German professors have clearly been thinking about this and have come up with an alternative solution to what the city's voters see as too strong a concentration of residential assets in the hands of a few major property companies.
Their primary concern is large investors and institutional real estate companies acting as landlords, and not with private individuals or owner-occupiers. The reforms could be achieved with "comparatively minor legislative corrections" to income tax, trade tax, inheritance tax and land transfer tax to remedy existing "misaligned incentives", they argue.
Clemens Fuest from Munich, Johanna Hey from Cologne and Christoph Spengel from Mannheim would prefer to tax rented properties more heavily instead of expropriating them. In a recently-published essay for Ifo Schnelldienst, they call for a widespread tax-based reform to help ease the housing shortage and the perceived sense of government inactivity in creating new housing stock.
"Instead of expropriating real estate, the legislator could think of providing for a tax on the increase in value in income tax, abolishing the trade tax exemption for real estate corporations and reforming the real estate transfer tax," they say. "Legislators could think about taxing capital gains outside the current 10-year period for income tax, abolishing the trade tax exemption for real estate corporations and reforming the real estate transfer tax."
Fuest is an economist and president of the Munich Ifo Institute, Spengel is a professor of business taxation in Mannheim, while Hey is the head of the Institute for Tax Law at Cologne University.
According to Fuest, "In the case of rented real estate, the double benefit of unlimited deduction of income-related expenses and tax exemption of the capital gain is one of the last remaining major tax breaks under income tax law," he said. To bring the taxation law into line with equity investments, he adds, this needed to be changed. "Capital gains would have to be fully taxed."
The professors draw a link between the urban housing shortage and the greater strain on government finances since the onset of the coronavirus pandemic in their proposals for reform of the tax system. This could be alleviated by taxing real estate more heavily and more equitably, they say. The tax priveliges they cite in their study for real estate ownership represent a "serious deviation" from the principle that incomes should be taxed equally.
"We recommend that existing, extensive tax privileges for real estate ownership, which primarily benefit economically very well-off households, be dismantled," they write. They argue that these tax advantages have additionally helped to fuel the rise in house prices. Their report highlight how half of all wealth in Germany is represented by real estate ownership, with the wealthiest ten percent of German households owning 70% of non-owner occupied real estate.
Further proposals came last week from economic think-tank Deutsche Institut für Wirtschaftsforschung (DIW) as an alternative to the expropriation demands of the majority of Berlin voters. They propose the introduction of a rent tax (Mietensteuer), whereby net 'cold' rents above 110 per cent of the local comparable rent (Mietspiegel) could be taxed at 10 to 30 per cent - the higher the rent, the higher the tax rate.
According to the DIW, the plan envisages apartment owners also being included via a fictitious rent. Berlin could thus collect a good 200 million euros a year and invest them in rent reductions or the construction of 7,500 new apartments. This would ease pressure on the housing market in Berlin and reduce rents for everyone, the DIW argued.
As the DIW points out, almost 100 years ago the so-called house interest tax (Hauszinssteuer) in Prussia had already been used in a similar way to re-divert profits from property owners, with the money flowing into new housing estates built by the city authorities.
