Why do citizens support a tax cut?
Tax cuts - if not now, when? –
A few months ago the tax policy debate in Germany took a surprising turn. While previously only plans to introduce new taxes (on digital sales, assets, CO2 emissions, financial transactions) or selective tax increases (corporate taxation, income from capital assets) set the agenda, all parties are now also discussing tax cuts. The triggers are apparently the ongoing budget surpluses and the approaching federal election in 2021.
In order to be able to assess whether the demand for tax relief is justified, one must first take a look at the economic and financial policy situation in Germany and its recent development. It makes sense to choose the term of office of Chancellor Angela Merkel, which began in 2005, as the reference period. In 2005 the nominal gross domestic product (GDP) was 2288 billion euros and the tax rate was 21.2%. By 2019, GDP rose to 3,436 billion euros and the tax rate to 24.0%. While the social contribution rate fell slightly from 17.5% to 17.4%, the tax rate increased by 13.2% (or 2.8 percentage points ).1 In arithmetical terms, the additional tax revenue of 339 billion euros was based on a growth component of 243 billion euros, which would have been received if the tax rate had remained constant, and a tax increase component of 96 billion euros annually.
Such a tightening of taxes is considerable if one considers that Germany suffered from pronounced weak growth and high unemployment until 2005; the number of unemployed was up to 5 million on a monthly basis. This record value has since been more than halved, which relieved the public budget as a whole, both on the income side and on the expenditure side. The Hartz reforms on the one hand and a very long upturn that began immediately after the 2008/2009 recession and continues to this day have contributed to this development. This fits in with the fact that the general public budget has not recorded a financing deficit since 2012, and has even had sustained surpluses in the last six years. Specifically, the fiscal balances in 2018 and 2019 were 1.9% and 1.2% of GDP, respectively. As a result, the debt ratio fell below the Maastricht limit of 60% of GDP for the first time since 2003.
After all, the government quota fell slightly from 46.8% to 45.3% of GDP in the period under review from 2005 to 2019. However, this decline requires a differentiated view, as it is based to a considerable extent on interest effects: Since 2005, the interest burden on the general public budget has fallen from 2.8% to 0.9% of GDP and thus considerably more than the government ratio If interest effects decrease, it can be seen that the government's non-interest expenditure has increased from 44.0% to 44.4% of GDP, despite the dazzling economy and falling unemployment figures.
Tax cuts now?
Since the end of the war, all radical tax cuts have been decided by social and Christian liberal and red-green coalitions. The now numerous grand coalitions have never achieved anything like this, since the partners always trumped each other with spending requests and blocked relief plans. Due to increasing political pressure, this rule could be broken. There is definitely room for maneuver, and a tax cut also appears justified, since the tax rate cannot be constantly increased and, as shown above, of the additional tax revenue of the last fifteen years, 96 billion euros per year were accounted for by tax increases: as a result of the introduction of new taxes , Increase in existing taxes and the so-called cold progression.
A hypothetical tax cut of 40 billion euros p. a. The state could have given back almost half of this special profit to the citizens in 2019 and at the same time complied with the constitutionally prescribed limits on national debt. With spending discipline and sustained growth, this potential for tax cuts is correspondingly greater in the coming years. Nationwide, the tax burden can be reduced immediately by at least 40 billion euros without violating the debt brake - in view of this finding, the desperate search for new tax sources with unchanged cold progression seems to be out of date. In the field of tax policy, too, “thinking about parking” is urgently needed.
When a financial scientist speaks of "tax cuts", citizens, politicians and journalists usually understand this expression as "income tax cuts", and defensive reactions inevitably arise due to feared distributional effects. Regardless of the fact that a reduction in income tax relieves higher incomes more than lower ones, since the former were also burdened more heavily than the latter, this narrowing of the term is inappropriate, since there are numerous other taxes that could also be used. These include regressive taxes such as sales tax, electricity tax, beer tax or coffee tax, which could be reduced or abolished entirely if there is no justification for them.3 In the case of property tax, the majority of which is passed on to tenants as a petty tax , the legislature could have used the draft of the Federal Constitutional Court last year to allow this tax to expire and to compensate the municipalities through greater participation in the revenue from community taxes. This would have made it possible to reduce the burden on tenants, which is as welcome as it is in line with the market.4 In addition, lowering or abolishing the property transfer tax could relieve both home buyers and companies that are restructuring. After all, there is a lot to suggest that part of the relief volume should be used to lower corporation tax and trade tax, since German corporate taxation is now back in a leading position in an international comparison.
Some of the reforms proposed here require careful preparation, especially since they are only conceivable if the vertical financial equalization is adjusted. The long overdue elimination of the solidarity surcharge, which would not only benefit all income earners, but also companies (as a result of the surcharges on corporate income tax and capital gains tax) could be implemented immediately. Overall, it is quite possible to allay distribution policy concerns by combining the above measures. B. abolishes the solidarity surcharge and the electricity and coffee tax and lowers sales tax. With this, the state would send the citizens a long-awaited positive signal and ignore foreign criticism of the budget surpluses.
There are several good reasons not to put off the tax relief that is currently possible:
- Firstly, the past few years have shown that budget leeway is otherwise consumed by spending increases that make subsequent tax cuts impossible. It is true that the state can hardly top up investment spending as a result of exhausted planning and construction capacities and any protest initiatives; The situation is different, however, in the fields of subsidies and transfer expenditure, where new “needs” are constantly being invented and then satisfied.
- Second, the current economic upswing will end at some point. A recession increases government spending and suddenly lowers government revenue, and the leeway provided by the debt brake in this case will probably not be enough to implement a stronger tax cut.
- Third and last, one should not hope for new political constellations. As is well known, the Jamaica negotiations failed because of the only and modest wish of the FDP to abolish the solidarity surcharge. From this point of view, a possible black-green coalition is anything but a guarantee for tax policy “rescheduling in the head”. The parking must be done autonomously.
- 1 Federal Ministry of Finance, monthly report January 2020. Tax ratios as defined in national accounts.
- 2 Eurostat, table gov_10a_main, key figure “interest payable”.
- 3 See the still current work by K. Tipke: Die Steuerrechtsordnung, Cologne 2012, which examines all taxes for their justification.
- 4 In the case of administered rental prices, property tax is borne by the tenant, unlike in a competitive case, see S. Homburg: Allgemeine Steuerlehre, München 2015, p. 110 ff.
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