Steps taken to mitigate the impact of the COVID pandemic have highlighted the issue. While it is true that “a little helps a lot”, rarely has it been more obvious that “a lot helps even more”. Having (more or less) set aside electoral squabbles, Germany’s coalition government has gathered generous armfuls of cash from the magic money tree and is now flooding the market with money. Germany is not alone in doing this – governments across Europe and around the world are taking the same approach. The economy needs as much support as possible, no matter what the cost; whether every single initiative makes good sense is, of course, open to debate. And because governments do not, as it happens, have instant access to a magic money tree, they must resort to the only tried-and-trusted source of funding available to them: debt. Which, at some point, must be repaid. Exactly when and by whom is the question – especially if businesses and the general population must work at less productive levels, significantly reducing the flow of tax revenues into government coffers. Are higher taxes the solution?
More and more people are already arguing that we cannot simply offload all our debts onto the shoulders of future generations, that “the wealthy” should make a contribution, that a wealth tax should be introduced because “being rich is unfair!”. The election campaign – on which Germany’s opposition parties at least have already embarked – has kicked off with precisely these messages, echoed by individual politicians seeking to make names for themselves at local or party leadership level by calling for a one-off coronavirus tax.
Time to take a step back and a closer look at the facts. In 2019, the federal government, federal states and municipalities collected around EUR 799 billion in taxes. Two taxes in particular represent a major source of income for the federal government: wage and income tax, at around EUR 283 billion, and sales tax (including import tax) at around EUR 243 billion. Withholding tax adds another EUR 5 billion. Turning the screws on the first two types of tax would have an immediate impact. On the other hand, the decision to cut value-added tax (VAT) to 16 percent until the end of 2020 is causing tax revenues to decline. It will be very interesting to see how this scenario develops.
Basic allowances and family benefits have just been raised in a move that will also reduce rather than increase government revenues. Raising tax rates for everyone would be unpopular, especially at a time when salaries have been reduced and federal elections are impending. So: what would be a more positive move? This is where we shift our focus to withholding tax – along with the question of why, at EUR 5 billion, it is currently so low? Former Federal Minister of Finance Peer Steinbrück pushed through the 25-percent withholding tax with the slogan “Better 25 percent of X than no X at all”. As a result, much of the investment income of wealthy customers – in contrast to, for example, rental income – is not taxed at the personal income-tax rate, but at a fixed 25 percent. And even then, only if the personal income-tax rate is higher; taxpayers with lower average income-tax rates can ask for the difference to be refunded.
In a break with past practice, everything above 25 percent goes straight into investors’ pockets. This is supposed to dissuade wealthy customers from sending their money abroad in favour of injecting it back into Germany’s economic cycle. Especially as, in an age of international data transfers, it has become much harder to send money abroad undetected. But if the flat rate were changed to match personal income-tax rates, it would be possible to generate many billions of euros in tax revenues in a socially acceptable manner. Many “ordinary” citizens are totally unaffected by tax exemptions and low interest rates.
It would be easy to explain this change to even the most sceptical audience – and above all, it would be popular, simply because it would only affect the rich. Why do complicated when you can do simple? We can do without a wealth tax, because wealth is usually created with money that has already been taxed. Instead, let us tax personal incomes using the same method regardless of source, by applying the relevant personal income-tax rate rather than a universal flat rate. This would be the fairest solution.