Does Germany need the exemption of family firms from inheritance taxation?

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In Germany small and medium sized firms are of high importance. Politicians regularly emphasize that family firms are the basis for the strength and the stability of the German economy. Furthermore family firms are supposed to make a significant contribution to the high level of employment in Germany. As a consequence, family firms are more or less fully exempt from inheritance taxation. However, these assumptions are not based on scientific evidence as the German Federal Constitutional Court stated in its decision dated 17.12.2014. This proposal intends to provide the missing empirical evidence in this context and thus to improve future policy decisions.There is no empirical evidence on how family firms react to a transfer of shares as a consequence of a succession plan. When evaluating the economic reaction of family firms to a succession plan it is important to consider the economic alternative: the sale of the firm. Without the exemption from inheritance taxation family firms might get into liquidity problems and the family may be forced to sell the firm. Considering the economic alternative, the exemption is justified only if family firms have a higher profitability and more employment in the scenario of a succession plan compared to the alternative scenario sale. The comparison of the two economic alternatives is the core innovation of this project. This research project will enrich the emotional and controversial discussion on the exemption of family firms from inheritance taxation with scientific evidence.