Old money for new ideas: Inheritance tax as innovation capital – The push for earmarked start-up financing

Venture capital crisis in Germany: Is inheritance tax really the solution?

Billions inherited almost tax-free: The risky plan to save the German startup scene

Germany's startup scene suffers from a chronic lack of capital and is increasingly losing innovative talent to other countries. At the same time, billions of euros in assets are transferred to the next generation almost tax-free every year during company successions. In this context, a proposal by prominent entrepreneurs is causing a stir: a portion of inheritance tax should be specifically earmarked to finance young, up-and-coming technology companies. The idea sounds compelling – existing capital should become the engine of innovation for tomorrow. But behind this elegant proposal lie massive hurdles: constitutional concerns, resistance from the German states, and the question of whether the relatively small sums involved are even sufficient to compete with international giants like the USA. Is earmarking inheritance tax the long-awaited solution to the venture capital crisis, or does it merely distract from the country's true, deep-seated structural problems?

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If existing capital is to finance new ideas – a risky reform proposal or the right answer to Germany's innovation crisis?

The idea initially sounds deceptively simple: One to five percent of the inheritance tax levied during the transfer of a company should be earmarked for financing young, innovative start-ups. Prominent entrepreneurs formulated this proposal in a so-called "letter of action" to the German government, thereby triggering a debate that extends far beyond tax policy. It touches upon fundamental questions about Germany's innovative capacity, distributive justice, and the role of the state as a catalyst for growth.

The foundation of the debate: What does inheritance tax actually bring in?

To put the proposal into perspective, it is essential to first look at the actual revenue from inheritance tax. In 2024, German tax authorities assessed inheritance and gift tax totaling €13.3 billion – a new record high, representing a 12.3 percent increase compared to the previous year. Of this, €8.5 billion was attributable to inheritance tax itself (up 9.5 percent compared to the previous year) and €4.8 billion to gift tax, which has more than doubled since 2021.

These figures initially suggest impressive tax leeway. However, there is a crucial catch: the assessed tax amount is not identical to the actual revenue. Due to extensive tax relief provisions for business assets, €13.3 billion was assessed in 2024, but only around €10 billion was actually due. Specifically, inheritance taxes were waived for 45 major heirs in the same year. Initially, taxes of €3.5 billion were assessed on eligible assets totaling approximately €12 billion – but around 95 percent of this was subsequently waived. Effectively, these 45 major heirs thus paid only around €180 million, which corresponds to about two percent of the transferred assets.

Inheritance tax is designed as a state tax: According to Article 106, Paragraph 2 of the Basic Law, its revenue flows entirely to the federal states and is administered by the state tax offices. Currently, the money ends up in the general budget of the respective states – without any legal earmarking for specific areas of expenditure such as education, infrastructure, or innovation. Critics have been pointing out for years that a significant portion of these funds is used for consumption rather than for productive investments.

The blind spot in the system: How much of the company's assets are actually taxed?

A central paradox of the German inheritance tax debate lies in the drastic discrepancy between the nominally transferred business assets and the taxes actually paid on them. In 2024, business assets with a total value of €21.5 billion were transferred through inheritances and gifts – 27.9 percent less than in the previous year. For so-called large acquisitions, meaning business assets valued at over €26 million, the transferred amount even halved to €8.6 billion.

In principle, current law provides extensive tax relief for heirs of businesses: Anyone who continues to operate a business at its existing scale for at least seven years and maintains jobs can benefit from a tax exemption of 85 percent (standard relief) or even 100 percent (optional relief). Since 2021, company assets worth approximately €24 billion have been transferred almost tax-free in this way, resulting in a loss of revenue of around €7.6 billion for the tax authorities. The Federal Constitutional Court has repeatedly ruled these regulations partially unconstitutional and ordered the legislature to enact new legislation – a process that has been ongoing for decades and is now gaining momentum again.

The structural imbalance is particularly striking: In 2024, 45 large heirs each received an average of €260 million, but effectively paid only around two percent tax on it. Ordinary citizens, on the other hand, who inherit a condominium or a small business, pay the full tax rate. The Tax Justice Network estimates the state's tax savings for these 45 large heirs at €3.4 billion.

Quantifying the potential: What the initiative would specifically achieve

Calculating the proposal's potential based on available figures reveals the following: Of the approximately €10 billion in inheritance tax revenue actually collected in 2024, around €100 million would be available for start-up financing if one percent were earmarked for this purpose. At five percent, this figure would rise to up to €500 million. Limiting the tax base to inheritance tax from business transfers results in an even smaller amount – especially since the actual tax payments made from business assets are structurally low due to tax relief provisions.

For comparison: The entire German venture capital market had an investment volume of €7.2 billion in 2025. In the same year, the USA invested around $209 billion in startups – measured against its gross domestic product, this corresponds to 0.7 percent of its economic output, while Germany only reached around 0.20 percent. A dedicated portion of the inheritance tax would therefore not create a structural solution, but could serve as a signal and a complementary component.

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The real problem: Germany's start-up financing crisis

The entrepreneurs' initiative addresses a real and urgent problem. According to a recent Bitkom survey of 133 technology startups, almost 48 percent are planning a new funding round for 2026, with an average target volume of four million euros. At the same time, only 17 percent of the surveyed startups consider the available venture capital supply in Germany to be sufficient. Particularly alarming: A quarter of the surveyed companies are considering leaving Germany due to a lack of funding.

This capital shortage is not a new problem, but it is becoming structurally more acute. Compared to other European countries, Germany's venture capital (VC) development is significantly below its economic potential. While the British VC market grew by 39 percent in 2025 compared to the previous year, and France by 31 percent, Germany stagnated with a slight decline of four percent, reaching a total volume of €7.2 billion. The high dependence on foreign capital is particularly critical: around two-thirds of VC investments in German startups in 2025 came from international investors. This makes the German startup ecosystem vulnerable to external shocks and geopolitical upheavals.

The exodus of innovative companies abroad – primarily to the USA, Great Britain and Switzerland – is not only an economic problem, but also a structural problem of prosperity: Along with the start-ups, jobs, tax revenues and technological know-how are lost.

Strengths of the proposal: What speaks in favor of the idea

The idea of ​​earmarking funds has considerable appeal from several perspectives. First, it attempts to activate a previously untapped flow of capital without placing an additional burden on the state budget. The proposal requires neither new debt nor redistribution from existing programs. Second, it creates an institutional link between two economically significant phenomena: the massive transfer of capital between generations in established companies and the chronic capital shortage faced by young, innovative companies.

Third, the approach possesses a certain political elegance: Should the Federal Constitutional Court, which will again rule on the constitutionality of the business asset privileges, mandate a tightening of inheritance tax for business transfers, the additional revenue could be specifically channeled into promoting innovation. Instead of designing the tax reform as a mere redistribution measure, it would become an active instrument of economic policy. Fourth, such a regulation would be compatible with international standards: Israel, the USA, and Sweden practice various forms of tax-based channeling of capital into venture capital markets – partly through sovereign wealth funds, partly through direct tax incentives.

Weaknesses and risks: What speaks against the idea

Despite these positive aspects, the structural objections are considerable. The most serious argument concerns the quantity: Even with an optimistic calculation using five percent of actual revenues, this amounts to less than €500 million annually. Given the billions of euros in funding gaps in the German venture capital system, this is a drop in the ocean. By comparison, the German government alone is providing around €30 billion in public funds and guarantees through the Germany Fund, with the total investment expected to generate €130 billion.

The second problem is of a constitutional and federal nature. Since inheritance tax is purely a state tax, all 16 federal states would have to agree to its earmarked use – or the federal government would have to shift jurisdiction through an amendment to the Basic Law (Germany's constitution). Financially weak states like Saxony, Thuringia, or Mecklenburg-Western Pomerania, which already receive only marginal revenue from inheritance tax, would reject such a regulation as a further weakening of their fiscal autonomy. The political feasibility of this idea within the federal system therefore appears extremely complex.

Thirdly, there are fundamental concerns regarding the instrument of earmarked funds itself. The German budgetary principle of non-affectation (the principle of total coverage) stipulates that all revenues must be used to cover all expenditures and are not allocated to specific purposes in advance. While exceptions exist, such as the mineral oil tax for road construction, these are considered a fiscal policy anomaly that can lead to inflexibility and misallocation. A financial expert from the family business associations rightly argues that even if the inheritance tax on business assets were reformed, there is no guarantee that the additional revenue would actually be used productively – historically, additional tax revenues tend to be used for consumption.

Fourth, the fundamental premise of the proposal itself is questionable. The initiative implicitly assumes that inheritance tax on business transfers will increase significantly. Given the existing exemptions, which are extremely favorable for business transfers, and the possibility of further liberalization following the expected Constitutional Court ruling, this is by no means certain. It could even be that a reform would reduce, rather than increase, the tax burden on business assets.

The elephant in the room: Structural solutions for Germany's VC crisis

The entrepreneurs' proposal addresses a genuine problem, but tackles it with a structurally inadequate instrument. The root cause of Germany's venture capital deficit lies not in the lack of individual funding programs, but in a systemic gap: Institutional investors such as pension funds, insurance companies, and retirement schemes hardly invest in venture capital in Germany, even though they are the primary providers of venture capital in other countries – particularly in the USA, Israel, and Sweden. American pension funds, for example, systematically allocate a portion of their assets under management to VC funds, thereby financing Silicon Valley's innovation pipeline.

The German government has recognized this bottleneck: With the Location Promotion Act of September 2025, initial steps were taken to improve the framework for venture capital and reduce investment barriers. The WIN initiative, in which business, associations, and politics have joined forces, aims to channel approximately €12 billion in additional capital into the German venture capital ecosystem by 2030. These approaches are structurally more effective than earmarking inheritance tax revenue.

Societal context: Who really inherits in Germany?

To fully understand the proposal, it's worth examining the overall societal distributional impact of inheritance dynamics in Germany. According to estimates by the DIW Berlin, assets worth approximately 300 to 400 billion euros are inherited or gifted annually in Germany. However, only about a quarter of this appears in tax statistics – the remainder stays completely tax-free due to high allowances and exemptions. The tax statistics, with their 13.3 billion euros in assessed values, thus capture only a small fraction of the actual wealth transfer.

More than half of all private wealth in Germany is inherited rather than earned. This wealth structure structurally favors those who are already wealthy and hinders social mobility through personal achievement. If inheritance tax – the only instrument that even begins to correct this wealth concentration – is now to be repurposed primarily as a financing vehicle for startups, the fundamental question arises: Cui bono? The beneficiaries would be predominantly tech-savvy, well-connected entrepreneurs from urban areas – not necessarily those social groups who would benefit most from a fair inheritance tax.

Evaluation and outlook: What remains of the proposal

Overall, the entrepreneurs' proposal is an intellectually interesting and, in some political terms, understandable initiative, but one that falls short in its concrete implementation. It deserves recognition for initiating a constructive dialogue on tax policy and innovation promotion – in a political climate where business associations and politicians often only discuss deregulation and subsidy reduction. The diagnosis – that Germany is losing innovative startups to other countries due to a lack of venture capital – is accurate and well-supported by current data.

However, the proposed therapy is too small-scale and conceptually too weak to solve the structural problem. An amount of €100 to €500 million annually – even in an optimistic scenario – is insufficient to close the gap that Germany has with the US ($209 billion), the UK, and France. Furthermore, there are significant federal and budgetary hurdles to earmarking inheritance tax revenue.

It would be more sensible to open up the institutional investor base to venture capital, to consistently implement the already initiated location promotion law, and to undertake a genuine reform of inheritance tax on business assets that takes the constitutional principle of equal taxation seriously. If billion-dollar inheritances are effectively taxed at two percent while an inherited condominium is taxed at 15 to 30 percent, this is not a system that can be legitimized by earmarking funds for startups. It is a system that needs to be fundamentally rethought – and the question of innovation financing should be just one of many considerations.

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