Gerrit B. Koester, Development of the German tax system in international perspective in:

Gerrit B. Koester

The political economy of tax reforms, page 24 - 29

An empirical analysis of new German data

1. Edition 2009, ISBN print: 978-3-8329-4131-4, ISBN online: 978-3-8452-1609-6

Series: Neue Studien zur Politischen Ökonomie, vol. 5

Bibliographic information
24 tax grew strongly in importance and increased from 4.4% of GDP in 1950 to more than 10.6% of GDP in 1977 and have been fluctuating around this level since then. Revenues of the sales tax, which was transformed into a value-added tax in 1968, showed an upward trend from 1950 to 2006 and increased from 4.9% of GDP in 1950 to 6.4% of GDP in 2006. Business taxes in form of the corporate profit and the local trade tax showed a slight downward trend since the beginning of the 1970s, while the importance of mineral oil taxes in the tax mix constantly increased. Mineral oil tax revenues grew from 0.4% of GDP in 1951 to 1.7% of GDP in 2006.15 3.2 Development of the German tax system in international perspective How has the German tax system developed in comparison to other industrialized countries? We start by reviewing the overall development of the tax and social security revenues16 in Germany compared to those OECD countries for which historical data are available.17 Then we move on to separate analyses of the development of income taxes, consumption taxes, and property taxes.18 Our analysis starts with the year 1965 (when comparable data became available for most OECD countries) and reviews the development until 2003.19 Public revenues in Germany (if measured by tax and social security revenues over GDP) were with 35.5% close to the average of all OECD countries (36.3%) in 2003 (see Figure 4). However, the development of the size of government in Germany has differed strongly from the other OECD members since then. From 1965 till 2003 the size of government in Germany (if measured by the ratio of social security contributions and tax revenues over GDP) grew only by 3.9 percentage points – the second lowest value after the US and substantially smaller than average growth within the OECD countries of 10.5 percentage points. The data indicate that the size of government was (compared to other OECD members) large in the mid-1960s but has grown only very slowly since then. 15 See for a more detailed discussion of revenue developments by kind of tax part IV.2. 16 For a discussion of the relationship of taxes and social security contributions in Germany see part II.4. 17 Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Mexico, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States of America. See OECD (2006). 18 For a more detailed discussion of international developments of tax systems see Bach (2001), OECD (2004) and European Commission (2004). For general trends in tax reforms see OECD (2004) and for an analysis of the evolution of tax structures Alt (1983). A discussion especially of the international development of personal income taxes can be found in OECD (1986/2006a). 19 Most of the following analyses of our data-set on tax reforms refer to the same time period (see part III). 25 OECD Total OECD America Italy Greece Japan Australia Norway New Zealand Sweden Finland Iceland Switzerland Austria OECD Europe European Union (15) Germany France Netherlands Belgium Luxembourg United Kingdom Ireland Denmark United States Canada 0 10 20 30 40 50 60 0 5 10 15 20 INCREASE 1965-2003 (percentage points) Total Tax and Social Security Revenues/ GDP (%) (2003) TAX REVENUES AND SOCIAL SECURITY CONTRIBUTIONS Data source: OECD Revenue Statistics (2006). Figure 4: Development of the tax and social security over GDP ratio (OECD 1965-2003) If we restrict our perspective to taxation (and exclude social security contributions), this development is even more pronounced (see Figure 5). From 1965 to 2003 the ratio of total tax revenues over GDP in Germany even decreased by two percentage points to 21.2%.20 The very slow increase of the total size of government in Germany was obviously solely driven by an increase in social security contributions, while the importance of tax revenues decreased. In 2003 the German tax over GDP ratio was the third lowest in the OECD after Japan and the United States. And the US were also the only country where the tax revenues over GDP ratio decreased since 1965 as well. It is important to note that this development was not due to strong revenue reductions within the last years as the German tax revenue over GDP ratio has been very stable.21 20 Please note that the OECD uses slightly different revenue definitions than the German Federal Statistical Office. Therefore we cannot directly compare the tax ratios discussed here with the tax ratios discussed in the previous part. 21 For details see the discussion within the previous part. 26 OECD Total European Union (15) Netherlands Belgium Luxembourg SpainGreece Portugal United States Japan Norway New Zealand Sweden Finland Iceland Switzerland Turkey OECD America Germany France United Kingdom Ireland Denmark Canada Australia Austria 0 5 10 15 20 25 30 35 40 45 50 -5 0 5 10 15 20 INCREASE 1965-2003 (percentage points) Total Tax Revenue/ GDP (%) (2003) TOTAL TAX REVENUES Data source: OECD Revenue Statistics (2006). Figure 5: Development of the tax revenues over GDP ratio in the OECD 1965- 2003 To analyze the German tax system in international perspective in more detail, we display the development of revenues from taxes on income, profits, and capital gains (as direct taxes)22, from consumptions taxes (as indirect taxes)23 and from property taxes24 in the following figures. In these graphs (see Figure 6, Figure 7, Figure 8) we see that the decrease in the total tax over GDP ratio resulted from a reduction of the importance of income taxes and property taxes, while consumptions taxes over GDP remained stable from 1965- 2003. Compared to other OECD countries the total income tax over GDP ratio (including income from profits and capital gains) was low in 2003 and had even been 22 Unfortunately, the aggregated OECD data does not allow for a clear-cut discrimination in between wage and income tax revenues and in between tax revenues from business, capital and labour income. Therefore we focus on the aggregate of all direct taxes on income, profits and capital gains. See for a description of the data OECD (2006). 23 For Germany especially the VAT, the mineral oil and the tobacco tax. 24 For Germany property tax revenues consists especially of revenues from the real estate and the real estate acquisition tax, the inheritance and gift tax and (before 1997) the net wealth tax. 27 slightly reduced (by one percentage point) from 1965 to 2003 (see Figure 6).25 A larger reduction of the income tax revenues over GDP ratio was only observable in the Netherlands (from a similar level). OECD America Belgium Luxembourg Spain Greece Portugal Japan Norway New Zealand Sweden Finland Iceland Turkey OECD Total OECD Europe Germany France Italy Netherlands United Kingdom Ireland Denmark United States Canada Australia Switzerland Austria 0 5 10 15 20 25 30 35 -5 0 5 10 15 20 CHANGE Total Income Tax Revenue/ GDP 1965-2003 (percentage points) Total Revenues from Taxes on Income, Profits and Capital Gains/ GDP (%) (2003) TAXES ON INCOME, PROFITS AND CAPITAL GAINS Data source: OECD Revenue Statistics (2006). Figure 6: Development of the total income tax revenues over GDP ratio in the OECD 1965-2003 The importance of consumption tax revenues remained unchanged since 1965, and consumption tax revenues accounted for 10.4% of GDP in 2003 – compared to an average rate of 11.5% in the OECD (see Figure 7). 25 From the detailed discussion of the development of the revenue structure in Germany in the previous part we know that the strong increase in wage and income taxes was compensated by a decrease in the importance of corporate profit and local trade taxes. Together these two developments resulted in a slight reduction of taxes from income, profits and capital gains over GDP. 28 OECD America Germany France Belgium LuxembourgIreland Denmark Spain Portugal United States Canada Japan Australia Norway New Zealand Sweden Finland Iceland Switzerland Turkey OECD Total OECD EuropeEuropean Union (15) NetherlandsUnited Kingdom Greece Austria 0 2 4 6 8 10 12 14 16 18 -4 -2 0 2 4 6 8 10 12 INCREASE 1965-2003 (percentage points) Consumption Tax Revenues/ GDP (%) (2003) TAXES ON CONSUMPTION Data source: OECD Revenue Statistics (2006). Figure 7: Development of the consumption tax revenues over GDP ratio 1965- 2003 In Germany, property taxes accounted for only 1.6% of GDP in 2003 – around 7% of total tax revenues (see Figure 8). The importance of property taxes in total taxation decreased slightly from 1965 to 2003. The tax burden of property taxes in Germany was – compared to all other OECD countries – around average in 2003 but compared to the European OECD states quite low (roughly 50% of the average of OECD Europe). Taken together we see that Germany had in 1965 a high and above OECD average tax revenues over GDP ratio – reflecting a comparatively large tax burden. As the ratio of tax revenues over GDP grew strongly in most OECD countries till 2003 (but fell in Germany), Germany had the third lowest tax revenues over GDP ratio of the OECD member states in 2003. While we observe on average large increases in the importance of income taxes in the OECD states, followed by moderate increases in the importance of consumption taxes and low increases in the importance of property taxes, the tax mix in Germany has been very stable. There are small reductions in the ratio of revenues from income, profits and capital gains taxes over GDP as well as in the ratio of property taxes over GDP, while the ratio of consumption taxes over GDP remained unchanged from 1965 to 2003. 29 OECD Europe OECD America France Italy Belgium United Kingdom Ireland Denmark Spain Greece United States Mexico Canada OECD Total European Union (15) Germany Portugal Korea 0 0,5 1 1,5 2 2,5 3 3,5 4 4,5 -2 -1,5 -1 -0,5 0 0,5 1 1,5 2 INCREASE 1965-2003 (percentage points) Revenues from property taxes / GDP (%) (2003) TAXES ON PROPERTY Data source: OECD Revenue Statistics (2006). Figure 8: Development of the property tax revenues over GDP ratio 1965-2003 3.3 Important trends in the development of the German tax system Since 1950 three trends have been especially important for the development of the German tax system. First, the importance of taxes for total public revenues (excluding social security) has strongly increased. Public revenues include e.g. fees for publicly provided services, privatization receipts or the surplus of the Bundesbank, the German Central Bank. The upper part of Figure 9 shows that tax revenues grew faster than total revenues till the end of the 1960s and that total revenues over GDP showed a stronger downward trend than tax revenues since the early 1980s.26 Based on these two developments the share of tax revenues over total revenues increased strongly from around 26 The figure is based on Bundesbank data (on public revenues) and tax statistics of the Federal Statistical Office.

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Was bestimmt die Steuerpolitik? Welche Ziele verfolgen die Bundesregierungen bei Steuerreformen? Haben Steuererhöhungen und Steuersenkungen einen Einfluss auf die Wahlergebnisse? Auf der Basis eines neuen Datensatzes zu den fiskalischen Effekten von Steuerreformen im Zeitraum von 1964 bis 2004 zeigt das Werk Muster der Steuerpolitik auf und testet zentrale ökonomische Hypothesen. Dabei zeigt sich, dass normative ökonomische Ansätze kaum einen Erklärungsbeitrag für die zu beobachtende Steuerpolitik leisten können.

Ausgehend von wichtigen polit-ökonomischen Theorien zeigt der Autor, dass die Mehrheitskonstellationen im Bundesrat einen wichtigen Einfluss auf die Steuerpolitik haben, allerdings genau umgekehrt wie von der Blockade-Hypothese behauptet: Steuerreformen sind gemessen an ihren Fiskaleffekten bei gegenläufigen Mehrheiten in Bundestag und Bundesrat häufiger und umfangreicher. Des Weiteren gibt es keine Hinweise darauf, dass die parteipolitische Zusammensetzung der Bundesregierung einen wichtigen Einfluss auf Steuerreformen hat. Wahltaktische Terminierungen von Steuerreformen spielen aber sehr wohl eine wichtige Rolle. Eine Auswertung des Zusammenhangs von Steuerreformen und Wahlergebnissen zeigt allerdings, dass die Versuche der Bundesregierungen, ihre Wiederwahlwahrscheinlichkeit durch Steuersenkungen kurz vor der Wahl zu erhöhen, wenig erfolgreich sind: Nicht nur die Jahre unmittelbar vor den Wahlterminen, sondern die Steuerpolitik in der gesamten Legislaturperiode hat einen Einfluss auf die Bundestagswahlergebnisse der regierenden Parteien.