19 II Structure and development of the German tax system How can the German tax system be characterized? As a background for our analyses of tax reforms, we shortly review the structure and the development of the German tax system. We start with the current tax system and then discuss the development before and after 1950. Finally we examine the relationship in between social security contributions and taxes and justify our decision to abstract from social security contributions in our analysis. 1 The German tax system – overview Wage and Income Tax 39% VAT 28% Other 6% Property Taxes 4% Tobacco Taxes 3% Mineral Oil Taxes 8% Business Taxes 12% Revenues/ Total Tax Revenues (2006) Data source: Federal Statistical Office (2007). TAX REVENUES AND TAX MIX Germany 2006 Figure 1: Tax revenues and tax mix – Germany 2006 20 The German tax system consists of 39 different taxes.1 However, most of these taxes are only of minor importance as the nine most important taxes accounted for 94% of all tax revenues in 2006 (see Figure 1). Measured in revenues terms, the wage and income tax and the value-added tax (VAT) are the most important taxes in Germany. They accounted together for ?rds of total tax revenues in 2006. Business taxes – in form of the corporate profit tax and the local trade tax (which is levied by the municipalities at individual rates on businesses) – amounted to another 12% of tax revenues. The most important excises are on mineral oil (8% of total revenues) and tobacco (3% of total tax revenues). Property taxes – in form of the real estate tax, the real estate acquisition tax, and the gift and inheritance tax – amounted to 4% of total revenue. The 30 other taxes – mostly small excises – yielded together only 6% of total revenues in 2006. TAX Wage and income tax Value-added tax (VAT) Corporate profit tax Local trade tax Mineral oil taxes Tobacco taxes Real estate tax Gift and inheritance tax Real estate acquisition tax Tax Base Synthetic income tax (income from 7 sources) Net value-added at every stage of production Profits of incorporated businesses on the basis of historical costs Business profits plus additions and reductions Motor fuel, furnace fuel and natural gas Sales of cigarettes, tobacco and cigars Tax Rates Progressive rate schedule (from 15% to 45%) Normal rate: 19%; reduced rate: 7% (since 2007) 25% for retained and distributed profits 5% base rate and local multipliers (on average 389% in 2005) €0.6698/l for unleaded fuel €0.4857/kg for Diesel Rates depending on volume and price (e.g. 0.0827/cigarette plus 25.29% of the final price) Peculiarities Additional 5.5% solidarity surcharge on tax payment Banking, sales of land and buildings, hospital and medical services are VAT exempt Additional 5,5% solidarity surcharge on the tax payment Tax payment is deductable from its own tax base and the tax base of income/corporate taxes Standard value of real estate; (tax A on farming and forestry; B for all others) Rates from 2.6‰ to 3.6 ‰ in Western Germany and local multipliers (for real estate tax A: 292%; B: 392%) Deductible as a business expense when calculating taxable business income Value of real estate (earningcapacity method); book value of other assets Rates varying from 7% to 50% depending on the relationship in between donor and donee High exemption level for spouses and for children; special regulations for passing on businesses Sale price of real estate 3.5% CURRENT TAX REGULATION (2007) Table 1: Tax rates and tax bases of main taxes (2007) In Table 1 we give an overview of the most important current regulations in taxation. We discuss regulation and reform of the main German taxes in detail in chapter IV.2. 1 If we count only those taxes that are important enough in revenue terms to be displayed separately in the tax revenue statistics of the Federal Statistical Office. 21 2 Historical roots of the German tax system While important parts of the current tax system date back to the 19th century,2 the foundation of the current system was formed mainly after 1913. Three developments were especially important.3 30,4 19,4 4,1 8 16,3 16,2 11,5 13,2 22,3 10,2 20,2 19,3 23,3 0 7,6 24,1 15,8 8,1 3,5 22,4 4,1 1913 1929 1950 Custom duties Sales tax Consumption taxes Property taxes Trade and real estate taxes Corporate taxes Wage and income tax TAX REVENUES AND TAX MIX Germany 1913-1950 TAX REVENUES/GDP REVENUE SHARES in % 21,9% 19,7%20,1% 17,0% 15,1% 7,7% 0% 5% 10% 15% 20% 25% 1913 1925 1929 1932 1936 1950 Data source: Hentschel (1983), pp. 273 ff. Tax Revenues/ GDP Figure 2: Development of the tax/GDP ratio and the tax mix 1913-1950 First, the tax revenue over GDP ratio – as an indicator of the general tax burden – almost tripled from 1913 to 1932 (see the left part of Figure 2). Tax revenues accounted for 20.1% of GDP already in 1932 which is close to the average level of 23% since 1950. The second important development was the introduction of a general sales tax4 which became the most important tax in revenue terms and accounted for more than 2 For example, the Miquel reform of 1891/93 introduced a general income tax in Prussia. See Kassner (2001). 3 Although tax revenue data from before 1950 is strongly distorted by two world wars (1914 to 1918 and 1939 to 1945), we can nonetheless identify important developments. For a more detailed discussion of the development of the German tax system in this period see Hentschel (1983), pp. 273 ff. 4 Transformed into a value-added tax in 1968.