79 2.5 Property taxes Property taxes in Germany consist of the real estate, the real estate acquisition, and the inheritance tax. They accounted for only 4% of total tax revenues in 2006 and showed only a very limited reform activity. Therefore, we review the regulation and reforms of these taxes only very shortly. 2.5.1 Property taxes: current regulation (2007) 2.5.1.1 The local real estate tax – current regulation In revenue terms, the real estate tax is the most important tax on property in Germany. Real estate tax is levied for each calendar year on real estate used for farming and forestry in form of the real estate tax A and for all other real estate in form of real estate tax B.131 The tax base is the value of real estate which is assessed on a special date by so called “standard” or “ratable” values (“Einheitswert”). As the standard values for land and buildings date back to 1964 (in case of the Eastern German states even to 1935) and have not been updated in recent years, buildings and land are widely believed to be considerably undervalued.132 A federal tax law sets basic tax rates on which the local authorities can apply their own multipliers.133 2.5.1.2 The real estate transfer tax – current regulation The acquisition of real property in Germany is subject to real estate transfer tax which is imposed on the agreed consideration (usually the purchase price) at a rate of 3.5%. In revenue terms the real estate acquisition tax is the second most important property tax in Germany. 131 Based on the real estate tax law from August 7th, 1973. See BGBl I (1973), pp. 965 ff. and subsequent changes. 132 The standard values are estimated to equal regularly about 20% to 50% of the market value of real estate. 133 Basic tax rates for farming and forestry (real estate tax A) are 6.0‰. Basic rates of the real estate tax B vary by kind of property and equal in between 2.6 ‰ and 3.5‰ in Western Germany and in between 5‰ and 10‰ in Eastern Germany (based on the lower standard values). In 2002 the weighted average of municipal multipliers for the real estate tax A equaled 289% in the Western German states (255% in the Eastern German states) and 370% for the real estate tax B (288% in Eastern Germany). For land without any buildings (which is not used for farming and forestry) this led in 2002 in Western Germany to a nominal average tax rate of 1.295%. However the effective tax rate is often lower as the real estate tax is deductible as a business expense from taxable business income. 80 2.5.1.3 The inheritance and gift tax – current regulation An inheritance and gift tax is levied on gifts and at death. The tax base is generally market value of the passed on assets, but the value of real estate is determined based on an earning-capacity method which usually leads to a lower tax burden on real estate than on other assets.134 Tax rates vary in between 7% and 50% according to the relationship in between donor and donee and are rising with the amount transferred. Tax-exempted allowances are varying as well according to the relationship in between donor and donee. For spouses the tax exemption level is €307,000 and for children €205,000, while non-relatives can claim only €5,200. Special regulations in case of passing on a running business apply. 2.5.2 Property taxes: reforms 2.5.2.1 Reforms of standard values Changes in the “standard” or “ratable” values (“Einheitswert”) for real estate have direct effects on the tax burden resulting from the real estate tax. Until 1996 standard values for real estate were applied as well in the inheritance and till 1997 in the net wealth tax (see below). Within the period analyzed, different standard values applied. Until 1974 tax laws refered to standard values calculated in 1935. This led to a considerable undervaluation of real estate. From January 1st, 1974 on, “new” standard values, which had been calculated already in 1964, applied.135 Until today this has been the last general update of standard values leading to a strong undervaluation of real estate.136 2.5.2.2 The real estate tax After the end of World War II in 1945 the German states introduced new real estate tax laws, but these were replaced by a federally harmonized real estate tax in 1951. Far-reaching reforms in the real estate tax law – despite changes in the municipal multipliers – have been very rare. Most important was the introduction of new standard values in 1974.137 The only other notable reform was the introduction of a special kind of real estate tax C for building land to stimulate construction (in place only from 1961 to 1962).138 134 See for a discussion Bach/Bartholmai (2001). 135 See BGBl I (1971), pp. 1165 ff. and BGBl I (1964), pp. 851 ff. 136 See for a discussion Bach/Bartholmai (2001). 137 The new standard values were implemented in the real estate tax law of 1973 (see BGBl I (1973), pp. 965 ff.) which is – with some subsequent changes – still valid. 138 See BGBl I (1960), pp. 341 ff. 81 2.5.2.3 The real estate acquisition tax After the end of the Second World War, the states were in charge of legislation in the real estate acquisition tax. A federally unified regulation was not implemented before 1983.139 In 1983 the tax rate was reduced from 7% to 2% financed largely by a reduction of tax exemptions and loopholes. A second important reform was the increase of the real estate acquisition tax rate from 2% to 3.5% in 1997.140 This strong increase aimed at compensating the revenue losses that resulted from the abolishment of the net wealth tax from 1997 on (see below).141 2.5.2.4 The inheritance and gift tax Federally harmonized inheritance taxes exist since 1906. Reforms were very rare in the period analyzed. Within a larger reform in 1974, the threshold for tax-exempted inheritances and the top tax rates were strongly increased.142 Further changes were the introduction of a tax exemption of €255,646 per company for business assets in 1994143 and a reform of the valuation of business assets for the inheritance tax in 1996.144 The most important change became effective in 1997145 when the valuation of real estate was changed from standard values (see above) to the earning-capacity method. This led to a higher valuation of real estate and strong revenue increases aimed at compensating revenue losses from the abolishment of the net wealth tax from 1997 on. Despite this change, real estate continued to be undervalued compared to market prices. 2.5.2.5 The net wealth tax Federal wealth taxes date back to the Erzberg reform of 1919/1920. As in the real estate taxes, reforms were rare. Within the large reform of property taxes in 1974/75, the tax rate of the net wealth tax was reduced from 1% to 0.7% for private house- 139 From 1970 on the real estate acquisition tax belonged to the “competing legislation” of the federal level and the German states. 140 See BGBl I (1997), pp. 418 ff. 141 One minor reform was the exemption of the real estate acquisition tax for owner based housing (one and two family houses) from 1977 to 1983. See BGBl l (1977), pp. 1213 ff. 142 For the widower the threshold was raised from DM30,000 to DM250,000 and for children and grandchildren to DM90,000 so that smaller inheritances remained tax-free. Tariff rates increased for spouses from 15% to 35% and the highest tariff class was reached at DM100m and not as before at DM10m. Tariff classes were reduced from 5 to 4. For details see Muscheid (1986), pp. 149 ff. 143 See BGBl I (1993), p. 845. 144 See BGBl I (1995), pp. 1250 ff. 145 See BGBl I (1996), p. 2049. 82 holds, but at the same time the possibility to subtract the net wealth tax from taxable income in the wage and income tax was abandoned.146 For corporations the rate remained at 1%. In 1977 a reform of the net wealth tax reduced the rates further from 0.7% to 0.5% for private households and from 1% to 0.7% for corporations.147 In 1983 the rate for corporations was reduced further to 0.6% but increased again in 1993 to 1%. In 1995 the constitutional court decided that the different valuation of assets (and the undervaluation of real estate) in the net wealth tax was unconstitutional. As a consequence, the net wealth tax was abolished altogether from January 1st, 1997 on.148 The resulting revenue loss149 was compensated by tax increases especially of the real estate and real estate acquisition tax. 2.5.3 Fiscal effects of reforms and revenue developments PROPERTY TAX REFORMS -0,02% 0,00% 0,02% 0,04% 0,06% 0,08% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 INCR RED Reforms of standard values Introduction of „earning capacity“ valuation Tax reflief for business assets INHERITANCE TAX -0,10% -0,05% 0,00% 0,05% 0,10% 0,15% 0,20% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 INCR RED Reforms of standard values Tax relief for owner occupied housing (Real estates Acquistion) Increase of tax rates (Real estates Acquistion) REAL ESTATE ACQUISITION TAXES -0,30% -0,20% -0,10% 0,00% 0,10% 0,20% 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 1 3 5 INCR RED Reforms of standard values Rate cut Rate increase Abolishment NET WEALTH TAX Fiscal Effects/ GDP Fiscal Effects/ GDP Fiscal Effects/ GDP Own calculations based on: Federal Ministry of Finance (2004)/Tax laws.Reforms by date of implementation. Figure 37: Fiscal effects of tax reforms in property taxes 146 This led to a reduction of revenues in the income and not in the net wealth tax. 147 See BGBl I (1977), pp. 1586 ff. 148 For a discussion of the reforms in net wealth and inheritance taxes after the ruling of the constitutional court see Eekhoff et al. (1999). 149 The losses were estimated to equal DM9.3 bn per year. 83 Figure 37 shows the fiscal effects of tax reforms in property taxes.150 We see that two large reforms dominate the reform patterns: First, the grand reform in 1974 (with the introduction of new standard values) and second, the fundamental changes in 1996/1997, when the wealth tax was abolished and inheritance (in 1996) and real estate acquisitions taxes (in 1997) were increased. Property tax revenues (as a share of total tax revenues) showed a strong downward trend from 1950 to 1974 (see Figure 38). This resulted especially from the decreasing importance of the real estate tax. Revenues of the real estate tax decreased strongly till 1974 (caused by the decreasing real standard values of real estate) and showed only a slight upward trend after the implementation of new standard values in 1974. The revenues of the net wealth tax increased until the early 1970s but then started to decrease and collapsed after the tax was abolished in 1997. Real estate acquisition and inheritance tax revenues were the least important revenue categories in the period analyzed and showed only a slight upward trend. PROPERTY TAXES - GERMANY 1950-2004 0% 1% 2% 3% 4% 5% 6% 7% 8% 19 52 19 55 19 58 19 61 19 64 19 67 19 70 19 73 19 76 19 79 19 82 19 85 19 88 19 91 19 94 19 97 20 00 20 03 PROPERTY TAX REVENUES REAL ESTATE TAX REVENUES REAL ESTATE ACQUISITION TAX REVENUES INHERITANCE AND GIFT TAX REVENUES NET WEALTH TAX REVENUES -1% 0% 1% 2% 65 68 71 74 77 80 83 86 89 92 95 98 1 4 Cumulated fiscal effects of tax reforms/Total tax revenues Real estate and acquisition tax Inheritance tax Net wealth tax Revenues/Total tax revenues Own calculations based on: Federal Ministry of Finance (2004)/Federal Statistical Office(2007).Reforms by date of implementation. Figure 38: Linking cumulated reform effects and revenue developments in property taxes 150 We have not illustrated tax reforms in the real estate tax as there were – besides the reform of standard values – no reforms on the federal level with substantial fiscal effects. Please note that the frequent changes in the municipal real estate tax multipliers are not included in our data-set. 84 Cumulated fiscal effects of tax reforms increased strongly in 1974 (driven by the real estate, the real estate acquisition and the net wealth tax). In 1997 cumulated reform effects of real estate and real estate acquisition tax were pushed up strongly by rate increases, while the abolishment of the net wealth tax had a negative effect (see the lower part of Figure 38). If we link cumulated reform effects and revenue developments, we find that the reform of standard values in 1974 stopped the downward trend in real estate taxes. Furthermore, revenues of real estate and real estate acquisition taxes increased strongly after the 1996/1997 reform. This led to overall stable property tax revenues despite the abolishment of the net wealth tax. Overall the share of tax revenues of the property taxes over all tax revenues has been very stable since the early 1970s not at least because of very low reform activities. 2.6 Summary What are the most important results from our analyses of reform patterns by kind of tax? First, we found that the general patterns of tax reforms differ strongly by kind of tax (see Figure 39). We found frequent and important reforms in wage and income taxes. Here tax reductions dominated and the fiscal effects of tax burden reductions were twice as high as the fiscal effects of tax burden increases. In business taxes, we observed barely any fiscally important changes via the corporate profit tax and the local trade tax until the mid-1970s. For the whole period covered we observed that almost all reforms in corporate profit and local trade taxation reduced the tax burden of businesses. In consumption taxes (VAT, mineral oil and tobacco taxes), we saw very frequent changes with large fiscal effects. We found that almost all tax reforms in these taxes led to increases in tax revenues. Property taxes were largely characterized by inactivity of tax policy. With respect to the detailed analyses of reforms in the different taxes, we found that the tax reforms with the most important fiscal effects were changes of the tariff schedule and of tax rates. This was especially true for the consumption taxes, but held as well in wage and income and the corporate profit taxes. The link in between cumulated tax reforms and revenue developments differed strongly by kind of tax. In the wage and income tax, cumulated reform effects were able to contribute to our understanding of the overall trend in revenues, but not of the divergent development of the different components of the wage and income tax (see part IV.2.1). In business taxes, some major reforms were reflected in the revenue development, but overall the link in between reforms and revenue developments was only weak. In the VAT, we were able to directly link rate changes and revenue developments. In mineral oil and tobacco taxes we saw some direct links in between tax reforms and revenue developments, but overall price and sales volume changes