Inheritance tax is back on the political agenda, just when the Federal Constitutional Court is about to rule on it. Critics warn that higher inheritance taxes risk capital flight, stifle investment, and threaten family businesses. Proponents argue the tax is essential to curb dynastic wealth and finance the welfare state. As always, reality is a bit more nuanced than this.

A recent survey of the empirical literature by economist Margit Schratzenstaller finds that behavioral responses to inheritance taxation exist - but are often less economically disruptive than political rhetoric suggests. The study synthesizes decades of international empirical research on whether inheritance taxes change behavior in ways that undermine their effectiveness. It looks at multiple channels: wealth accumulation, migration, saving behavior, early transfers of wealth (gifts), and tax avoidance.

The central conclusion is that real economic responses - such as reduced saving or large-scale relocation to lower-tax jurisdictions - tend to be modest in most cases. By contrast, tax planning and avoidance strategies are far more pronounced, especially among the very wealthy and older individuals with substantial assets. While average responses are moderate, the very rich react strongly. They tend to exploit exemptions, shift assets, split estates, or transfer wealth early - often legally - to minimize tax liabilities. These planning strategies can significantly reduce the effective tax base without affecting underlying economic activity. In other words, inheritance taxes do not usually cause people to stop working or flee en masse. Instead, they encourage those with the greatest means to hire tax lawyers.

This distinction matters for policy. It implies that the main threat to inheritance tax revenue is not economic damage, but loopholes in tax design. Simplifying systems, limiting exemptions, and closing avoidance channels may matter more than rate reductions.

Germany offers a prime illustration of these tensions. On paper, it has a progressive inheritance tax with generous allowances: children can inherit up to €400,000 tax free, spouses €500,000. In practice, extensive exemptions - particularly for business assets and real estate - significantly narrow the tax base.

These exemptions are now under scrutiny. Several cases are pending before the Federal Constitutional Court, examining whether preferential treatment of business assets violates the principle of equal taxation. A highly anticipated ruling, expected in 2026, could force lawmakers to revisit long standing privileges. Meanwhile, political positions diverge sharply. The Social Democrats and Greens argue that large inheritances are undertaxed and contribute to entrenched inequality. The research suggests inheritance taxes can reduce wealth concentration - but only if they are well designed. High exemption thresholds coupled with meaningful taxation of very large estates appear more effective than systems that privilege certain asset types indiscriminately.