Germany Is Still Neoliberal

It’s been a little over two years in the so-called “traffic-light coalition” between the Social Democrats (SPD), Greens, and Free Democrats (FDP) began its four-year term at the tail end of 2021. Helmed by the remarkably uncharismatic Chancellor Olaf Scholz, the coalition nevertheless inspired a degree of hope that the worst excesses of the neoliberal era would be curbed, and that with a Green foreign minister, the country would finally stop selling weapons to authoritarian regimes. The presence of FDP austerity hawks ensured that the new government would be shaped by compromises in all directions, but, the parties promised, it would nevertheless be a “coalition of progress”.

Fast-forward to 2024, and those hopes have been dashed, to say the least. The traffic-light coalition has not only ramped up weapons sales to Saudi Arabia, arguing that Germany needs the revenue to fund social spending, but has also imposed cruel sanctions on benefits recipients, slashed subsidies for farmers, and generally done its utmost to alienate wide swathes of the population, making it one of the least-popular governments in recent German history. Increasingly, commentators are speculating whether Scholz will be able to fill out the rest of his term.

What did the coalition promise, and why did it fail to deliver? Inequality researcher Martyna Linartas spoke with the Rosa Luxemburg Foundation’s Eva Völpel about the coalition government’s neoliberal financial policies, the communication strategies of big-money lobbyists, and tax policy myths.

There are a whole host of figures that illustrate the scale of inequality in Germany. Which do you find most striking?

I think the most eye-catching statistic is that two families are wealthier than the poorest 50 percent of the German population, i.e. 41.5 million people. Another effective way to convey the scale of superwealth is to imagine an A4 piece of paper that represents wealth in Germany. Those with less than 50,000 euro make up the bottom centimetre, and those with 1.5 million would be at the very top. This single page represents 99 percent of Germans. But the wealthiest are worth 40–50 billion, so much that they would hover ten kilometres above the top of the page.

The coalition government wanted to create a more caring society. What is your verdict on their first two years in office?

I’m bitterly disappointed. During their campaign, Olaf Scholz and Robert Habeck said they cared about fairness, climate change, social issues, and respect. But we are still seeing neoliberal financial policies, wealth is being redistributed from the bottom to the top, and taxes are generally seen as a burden.

When it comes to issues of extreme inequality, it isn’t simply a social matter but an economic one.

We are in desperate need of a paradigm shift. But instead, we have Robert Habeck saying in mid-December that the coalition’s compromise to resolve its budget crisis was the only possible solution. This immediately calls to mind Margaret Thatcher’s famous slogan: “There is no alternative.” Politics unnecessarily talks down its own powers. Social issues and climate change are not prioritized as they ought to be.

How can this be changed?

If we’re thinking in small steps, I would first turn to tried and tested methods, in particular off-budget funds. We need a special fund to tackle climate change, one to fight child poverty, and another for education. We need to move away from the mantra that taxes mustn’t rise. We are dealing with war, we are dealing with crises, and we see that even in times of immense crisis, the richer get richer and poverty reaches record highs, which is completely absurd.

We need to listen to researchers and civil society and be guided by our aims. What needs to be done to strengthen democracy? In other words, how can we build a more cohesive society? How can we help those who need it most?

But we also need to think about what we can do to strengthen the middle class. Then we need to get things back on track. If we take a goal-orientated approach, useful steps would be to increase the top rate of income tax, reform inheritance tax, and reinstate a wealth tax.

Time and again, surveys show a large majority of people in Germany are in favour of higher taxes on the wealthy, but this never seems to cut through to the world of politics. Why?

There is an important paper titled “Why is it so difficult to tax the rich”, which explains the critical role played mainly by big money and the long-term communication strategies of its lobby. For instance, we see that Stiftung Familienunternehmen, a foundation for family businesses in Germany and Europe, is spending millions to protect privileges worth billions. What we thus need is a long-term communication strategy from civil society.

Several organizations have been drawing greater attention to the issue of inequality in recent years. Do you think this work is bearing fruit?

An analysis by Moritz Gartiser shows that until 2021, inheritance tax was more likely to be framed negatively and that a balance between negative and positive “frames” has only recently been established. A shift is thus taking place in discussions, and we must encourage this change through awareness raising and communication.

Another issue is how the rich and the poor perceive themselves. Many consider themselves middle class. Take Friedrich Merz, for instance, who flies around in a private jet but thinks he’s upper-middle class. This is problematic because people need to be able to see that inequality exists. If we can communicate this message to a much broader section of society, I think we could potentially see a growing call for wealth redistribution.

But we obviously also need brave, progressive politicians with integrity, and they are lacking. We always talk about how Christian Lindner and the FDP are the ones blocking policy in the coalition, but what about Robert Habeck and Olaf Scholz? If Scholz were serious about respect, he would put his foot down and say, “Enough is enough.”

Fiscal policy doesn’t simply appear fully formed. We have the power to change it, and making sure it is fair is essential.

When it comes to issues of extreme inequality, it isn’t simply a social matter but an economic one, as the World Bank, the International Monetary Fund, and the World Economic Forum are now realizing. This idea is also gaining traction in the US, where it is becoming clear that supply-based, neoliberal politics don’t work. Developing the economy by reducing inequality and boosting investment is an idea that would also appeal to the FDP.

We can’t speak about inequality without mentioning tax myths, for instance in the debate around inheritance tax reforms.

Absolutely! We need to raise much more awareness about these myths and be much more vocal in our criticism of those who perpetuate such myths to maintain the status quo. What’s so insidious is that big-money lobbyists are able to use communication strategies to make us all think we are the victims of reforms.

Look at inheritance tax. Often, those opposed to inheritance tax act as if grandma’s little house is going to be taken away. Yet family homes have been explicitly exempt from inheritance tax since 2009. But that doesn’t stop Markus Söder from claiming the opposite. We cannot allow a politician to get away with such lies.

Here the media, who sometimes uncritically report such claims, are also to blame. Some do so wilfully, others because they lack knowledge on the issue.

We also need to do more to educate journalists. The media is the fourth pillar of the state. It is vital that journalists be equipped with the knowledge to effectively engage with an issue as important as inequality.

I was absolutely flabbergasted when Der Spiegel uncritically reported on Söder’s comment on inheritance tax and family homes. Another example is the classic diversionary tactic of speaking about income inequality, when the main issue is actually wealth inequality.

A common argument is also that higher taxes on business assets would threaten jobs or that companies would relocate to another country.

Yes, that is one of the most common narratives. Yet back in 2012, the Advisory Board of the German Federal Ministry of Finance explicitly stated that this was not true. Empirically speaking, there is no known case of even one job being lost because of a rise in inheritance tax. The OECD also investigated whether this theory applied to its member states and reached the same conclusion. There is nothing that supports this narrative. It is a myth.

Incidentally, there is evidence that the privileges granted to the heirs of large business assets actually create structures that threaten jobs. It seems family members don’t always make the best managers.

What about the relocation argument?

There are individual cases — anecdotal evidence — of extremely wealthy individuals who have left. Klaus-Michael Kühne is one such example. He emigrated to Switzerland. But studies essentially show that, generally speaking, such relocations don’t happen.

If they do, we have the political power to act. For instance, tax can be tied to the jurisdiction where revenue is generated and not where the company is headquartered. These ideas play an important role in approaches to tackling shell companies, for example. A person’s tax domicile can also be tied to their nationality.

We have incredibly low social mobility in Germany, only the US performs worse.

Or you can stipulate that individuals who have benefitted from this country’s infrastructure for decades and amassed their wealth here cannot evade the tax system simply by relocating to another country, but are obliged to pay taxes in Germany for exactly the same length of time or even longer. We could also allow long deferral periods of ten or 15 years if the inheritance tax cannot be raised immediately. In such cases, the state can also become a silent partner in a company and thus prevent it being sold to the highest international bidder.

Fiscal policy doesn’t simply appear fully formed. We have the power to change it, and making sure it is fair is essential.

In addition to the tax reforms already mentioned, there is also the idea of an “inheritance for all”. A few years ago, economist Thomas Piketty suggested giving every young person a one-off payment equal to 60 percent of a nation’s average wealth when they turn 25. In Germany, that would translate to roughly 120,000 euro. Is that a good idea?

I’m a huge fan of this approach, because it isn’t simply about finally getting the wealthy to pay their fair share, it’s also about aiding wealth creation.

Forum New Economy partnered with the German Institute for Economic Research to study a range of methods to reduce wealth inequality. Universal inheritance would be by far the most effective way to reduce inequality. We are one of the wealthiest countries in the world, we can afford to do it.

Although Piketty ties the payment to certain conditions, with citizens only receiving the sum when they turn 25, his teacher Anthony Atkinson wrote the brilliant book Inequality: What Can Be Done?, in which he argues that we should make such payments at birth. That’s an even better idea in my view, because the problems associated with inequality don’t just begin at 25.

We have incredibly low social mobility in Germany, only the US performs worse according to a 2018 OECD report. In this country, it takes six generations to escape poverty and earn the mean income. Over one in five children live in poverty in Germany and among those raised by a single parent, especially women, as many as four in ten children are at risk of poverty. Universal inheritance would make a huge long-term difference to children who have no control over the socio-economic circumstances into which they are born. Alongside this, we, of course, also need considerable investment in the education sector.

Let’s take a look at another structural problem: wealth inequality, i.e. how the consumption of luxury goods and the investment decisions of the superrich are fuelling the climate crisis. What solutions do you suggest?

I’m very grateful that you ask this question, as we must draw more attention to the link between inequality and climate change. To keep global warming below two degrees Celsius, we must reduce CO2 emissions to less than three tonnes for every person on the planet. In Europe, we produce around six tonnes per capita. But if we look at the world’s richest one percent, we see that these people produce on average 48 tonnes of CO2 per year. Multibillionaire Roman Abramovich is responsible for an incredible 22,000 tonnes.

We need to address this inequality. Only a handful of individuals bear enormous responsibility for the climate crisis. Here too, the answer should be to tackle the issue through taxation. Everyone should have a certain CO2 quota and everything above this figure would then be subject to highly progressive and extremely high taxation, designed in a way that will hit carbon emitters where it hurts but allow the rest to breathe easy.

Translation by Nivene Rafaat for Gegensatz Translation Collective.