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Gerrit B. Koester, The relationship of social security contributions and taxation in:

Gerrit B. Koester

The political economy of tax reforms, page 32 - 35

An empirical analysis of new German data

1. Edition 2009, ISBN print: 978-3-8329-4131-4, ISBN online: 978-3-8452-1609-6 https://doi.org/10.5771/9783845216096

Series: Neue Studien zur Politischen Ökonomie, vol. 5

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32 from 0.11 to 0.19 (if the different components of the wage and income tax are treated separately) (see the upper part of Figure 11). 0,0% 0,1% 0,2% 0,3% 0,4% 0,5% 0,6% 0,7% 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Smallest 15 taxes Smallest 10 taxes 20% 30% 40% 50% 60% 70% 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Income and Wage Tax and VAT Income and Wage Tax 0 0,05 0,1 0,15 0,2 0,25 0,3 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Herfindahl Index; tax revenues (wage and income tax as one tax) Herfindahl Index; tax revenues (all components of wage and income tax seperated) TAX MIX CONCENTRATION - GERMANY 1950-2004 Data source: Federal Statistical Office (2007). Index Revenues/Total tax revenues Revenues/Total tax revenues Figure 11: Development of the tax mix concentration A closer look at the development of the revenue shares of different taxes shows that the increasing concentration of the tax mix resulted from the largest two taxes (wage and income tax and VAT in the middle graph of Figure 11). The share of the two most important taxes increased strongly while concentration at the lower bound has changed only marginally (see the development of the smallest 10 and the smallest 15 taxes in the lower graph of Figure 11). 4 The relationship of social security contributions and taxation Social security contributions are integrated in many analyses of taxation and tax policy. Therefore, we shortly review the development of the social security system. We discuss its relation to taxation and tax policy and the arguments for and against an integration of social security contributions in our analysis of the political economy of taxation. 33 The German system of social security consists of a public pension, health, unemployment and old-age nursing care insurance.32 Membership is mandatory for all dependent employees (not for the self-employed or public servants), but in the public health insurance employees above a certain income threshold can opt out of the public system. Contributions are paid by a proportional rate for all labor income up to a maximum contributing income (which varies in between the different insurances)33 and are normally shared almost equally between employees and employers.34 0% 5% 10% 15% 20% 25% 30% 35% 40% 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Tax and social security revenues/GDP Tax revenues/GDP Social security revenues/GDP TAX AND SOCIAL SECURITY REVENUES 1950-2004 Data source: Federal Statistical Office/Ministry of Labour and Social Affairs. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 19 50 19 52 19 54 19 56 19 58 19 60 19 62 19 64 19 66 19 68 19 70 19 72 19 74 19 76 19 78 19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 Sum Pension Health Unemployment Nursing care Social security contribution rates Revenues/GDP Figure 12: Development of social security revenues and contribution rates Figure 12 reflects the development of social security and tax revenues since 1950. The graph shows that the increase of social security and tax revenues over GDP from 25% in 1950 to around 35% of GDP in recent times was largely attributable to an increase in social security revenues while tax revenues were relatively stable. The increase in social security revenues was triggered by rising costs especially for health care and pensions. To finance these costs, contribution rates were increased 32 Additionally there is an accident insurance financed by the employers. 33 For a more detailed discussion of the German social security system from an economic perspective see Blankart (2006), pp. 411 ff. 34 With respect to their formal incidence. 34 successively and more than doubled since 1950 (see the lower part of Figure 12). Employer and employee contributions together amounted to 42% of gross wages in 2006.35 Should we integrate social security contributions in our analysis of the political economy of tax reforms or just focus on taxation? There are several arguments in favor of an integration of taxes and social security contributions in our analysis. One could argue that social security contributions are very similar to wage and income taxes in that they are both largely based on labor income and are mandatory for large parts of the population. If we look at the effects on labor supply and labor demand, taxes and social security contributions are close substitutes. Furthermore, countries differ in the tax-financing of their social system. When analyzing the public sector in international comparative perspective, we therefore often should integrate the analysis of social security contributions and taxes. Finally, there is a connection in between taxes and social security contributions via the revenue side by tax-financed subsidies to social security.36 But on the other hand taxes and social security contributions differ substantially in their redistributive effects. One example is that redistribution via taxes can – especially in countries with a progressive tax system – often be discussed as redistribution from rich to poor while for example pension insurance (in case of a pay-asyou-go system) is more a redistribution in between old and young.37 For approaches which focus on an analysis of redistributive effects in a national context it makes therefore usually sense to separate taxation and social security. In this study we concentrate on the analysis tax policy. Therefore it is decisive for us, whether direct linkages in between tax policy decisions and social security play an important role. In recent years there have been examples for direct linkages of tax and social security policy. The so-called “ecological tax” – an excise especially on electricity and mineral oil – was introduced in April 199938 and the revenues from this tax were earmarked to subsidize the public pension insurance. With respect to tobacco taxes, the revenues of the most recent increases were assigned to subsidize the public health insurances.39 If these links were very common, we would have to integrate tax policy and social security decisions. However, in the history of German tax policy after World War II these direct linkages are exceptional. Usually there is 35 A second important variable in the social security system is the income threshold up to which social security contributions are raised. The absolute threshold for the maximum contributing income increased slowly till the mid 1960s and then more rapidly till recently. However the increase has been largely in line with the development of average employee earnings in manufacturing so that the threshold relative to average earnings has been relatively stable. 36 The federal level currently subsidizes for example the public pension insurance by around € 80bn per year (nearly one third of the federal budget). This is financed by tax revenues. 37 See for example the discussion in Persson/Tabellini (2002). 38 For the most important laws see: introduction of the ecological tax reform 1999 (BGBl I (1999), pp. 378 ff.); continuation of the ecological tax reform 1999 (BGBl I (1999), pp. 2432 ff.) and the law on the further development of the ecological tax reform 2002 (BGBl I (2002), pp. 4602 ff.). 39 See part IV.2.4 for reforms in the tobacco taxes. 35 no direct linkage in between tax policy and social security. Furthermore, we have to take into account that an integration of social security in the analysis of taxation strongly increases the analytical complexity. Based on our focus on tax policy and our goal of a parsimonious analysis we therefore separate the analysis of tax policy and largely abstract from the social security system in the following. 5 Summary The German tax system is highly fragmented and raises revenue from 39 taxes. However, only nine taxes accounted for the lion’s share of 94% of all tax revenues in 2006. Most important were the wage and income tax and the VAT, which together made up around ? of total revenues. Historically the roots for the current German tax system lie in the period from 1916 to 1921 when a sales tax (later transformed into a VAT) was introduced and tax legislation was federally unified in Germany. After 1950, the revenue structure of the German tax system has been very stable and only the importance of the wage and income tax has increased strongly. An international comparison shows that the German tax over GDP ratio was comparatively high in 1965. However Germany did not participate in the international trend to expand taxation but reduced the tax burden and therefore had in 2003 the third-lowest tax revenue over GDP ratio out of 20 OECD countries for which the relevant data is available. Since 1950 the development of the German tax system has been characterized by an increasing importance of taxes for public revenues (excluding social security contributions), a reduction of the number of taxes from 47 in 1952 to 39 in 2006 and an increasing concentration of the tax mix resulting especially from a strong increase of the revenue share of the two most important taxes: wage and income tax and VAT. In our following analyses of tax policy we largely abstract from social security, because the direct influence of the social security system on tax policy has been negligible in the period analyzed.

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Zusammenfassung

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.