Angela Merkel won’t let tax kill the Mittelstand

This week’s ruling on inheritance tax from Germany’s highest court has led to a flurry of debate about how it will affect the country’s family businesses, with some saying it could undermine the sector.

But the country’s politicians are likely to fudge the issue and family businesses in Europe’s biggest economy will continue to thrive. Here’s why.

The Federal Constitutional Court has made a ruling on inheritance tax that says the German government must revise rules that allow families to transfer companies from one generation to the next without paying estate tax. But the government has a long time – June 2016 – before it has to amend the tax laws.

A lot can happen between now and then, not least fierce lobbying by groups like the powerful BVMW – the German association of small and medium sized companies – to ensure any amendments to the tax laws affects its members minimally.

The BVMW has some strong economic arguments to support its position. Here’s a snapshot  – small and medium sized enterprises in Germany create around 70% of all new jobs, they pay most of the country’s sale taxes, and provide most of the innovation and patents for the economy. The Mittelstand is a huge force to be reckoned with and the BVMW is a strong voice to get its opinion across.

Also, don’t underestimate the lobbying efforts of Germany’s bigger family businesses. They are likely to be more discreet but nonetheless powerful in their influence over policymakers. Will any German government undermine such world-beating businesses like BMW and Henkel with a draconian tax regime?

But the biggest deterrent to much tougher tax laws on family businesses is the German chancellor Angela Merkel. She has often talked about the “hidden gems” of German economy – the thousands of family-controlled businesses that make things crucial to the global economy.

Last month, Merkel spoke at a conference in Berlin on family businesses – that in itself demonstrates how important she considers the sector. But two comments Merkel made underline her and her party’s commitment to the sector.

“One of the disasters of the former German Democratic Republic was that family businesses were expropriated,” she said. “Their traditions were remembered only in faded lettering on the walls of buildings.”

She added: “Family businesses are exemplary of what our social-economic model is all about: they combine the fundamental values of freedom and responsibility.”

That, most would agree, is pretty unequivocal support for the sector.

Yes, there will be some tinkering with inheritance tax for family businesses, which will create some rumblings among the country’s bigger companies. There are some strong arguments to say maybe they can afford to pay more without undermining their economic contribution to the German economy.

But family businesses will continue to thrive in Germany – there is too much at stake if they are undermined.