Ifo Viewpoint No. 69: The Envy Tax

Hans-Werner Sinn
Munich, November 8, 2005

Udo Steiner, the German Constitutional Court judge, once said that the Germans are equity sick. That is a polite circumscription of the envy complex from which the German people suffer. Socialism was invented by Germans and in its core is an ideology of envy, the attempt to make enviousness acceptable and create a socially received organisation form for it. The envy ideology that was formulated by Karl Marx and Friedrich Engels spread from Germany to the entire world and for half a century became state reason for 28 percent of humanity. One fifth of the Germans participated in this experiment, like it or not.

National Socialism also exploited the envy complex for its goals. The reference to socialism in its name is no accident. Hitler knew how to do justice to the needs of the working class and the petty bourgeois. The persecution of the Jews was also to a substantial extent motivated by the enviousness of the proletariat of the wealthy middle class. The Jews were economically successful and held far more of the well paid jobs in society than corresponded to their share in the population. They were the natural victims of the envy complex.

Unfortunately, the envy complex is still alive, albeit in different clothes. Although not even the PDS (the German socialist party) is arguing for a socialist planned economy today, envy under the cover of demands for social justice penetrates the public debate. It clouds the look at the economic necessities in times of globalisation and paralyses parliament and the administration in their search for adequate policy reactions.

Hardly a politician dares to explain to the people in clear words how a market economy works. Nobody tells them that inequality is the prerequisite for economic prosperity and that in a market economy income is not generated according to the principle of equity but according to the principle of scarcity. And the people are left in the dark about the fact that more equality can only be had at the cost of a shrinking pie available for distribution. Neo-liberal insights are truly frowned upon.

In Germany, wealth is suspect, especially such wealth that is based on one’s own labour. Old aristocracy and inherited wealth are still halfway accepted. So is the wealth of soccer players, tennis aces and media stars. But, god forbid, if someone is newly rich and has accumulated his wealth by his own involvement, risk taking, industry or luck. Then things become suspicious. Someone who improves his position on the social ladder is immediately presumed to be dishonest. He is under suspicion because he is making the relative position of others worse.

Germans’ preferences are only in part directed at their own well-being. Almost more important is how they are faring relative to their neighbours. Presumably, many people would consider themselves happier even if some of the wealth were taken from the rich and were then simply destroyed.

Americans are quite different in this respect. They admire wealth. Envy is not accepted but is ostracised politically. Since everybody can at least in his imagination move from dishwasher to millionaire, he does not envy the millionaire’s wealth, but instead strives to become one himself. The consequences for economic growth and general prosperity are obvious.

In Germany, nobody wants to rise from dishwasher to millionaire; instead the problem is to be solved by a millionaire’s tax. Shortly after the abolition of bank secrecy and the introduction of the transparency law for management salaries, several political parties took up the cause of a millionaire’s tax. They justify it by the alleged redistribution from the poor to the rich caused by the tax reform.

This testifies to a strange conceptual confusion, but it reflects broad-based ideas of vested rights. Of course, the reduction of the top tax rate has been more advantageous to the rich than the poor. Since the lowest 40 percent of income recipients pay almost no (3 percent) income tax and the highest ten percent are responsible for about half (53 percent) of the income tax revenue, there is just no other way.

A millionaire’s tax that has an income ceiling of one million deutschmarks or 500,000 euros, would cover 36,000 tax payers with total income of 49 billion euros. In the past, these tax payers paid about 20 billion euros in income taxes. This “leaves“ another 29 billion euros, corresponding to a good third of annual net government borrowing.

Why doesn`t one make tabula rasa and take away the millionaires’ total income? Then, for one or two years one would perhaps have these 29 billion euros in additional tax revenue and would then have to close up shop. Because then at the latest, the millionaires would have left together with their incomes. Germany’s economy would have collapsed as would have the other tax revenues. All Germans would be equally poor and the envy preferences would be finally satisfied.

Hans-Werner Sinn
Professor of Economics and Finance
President of the Ifo Institute

Published under the title "Sozialismus und Neid“, Wirtschaftswoche, No. 34, August 18, 2005, p. 114.