Social aspects of the grand tax reform

By Jörg Sancho Pernas

After the election for the Bundestag and the resulting change of government, the grand tax reform is one of the big topics of the red-green coalition. Reasons for the necessity of the tax reform are the increasing injustice in taxation and a low level of efficiency of the tax system. Angelina Sörgel comments that the last government had created an unfair tax political situation, where wage taxes and profit taxes have been increased from 1991 by 100 billions DEM, but the sum of corporations and income taxes declined by 32 billions DEM. Income millionaires would take advantage of tax privileges, what leads to the fact that they become "tax-free". The most taxes would be paid by the middle class workers and employees, who cannot shape their tax burden without receiving state transfers.

While the last government was not able to reform the tax system, SPD and Grüne are now challenging to introduce an ecological tax reform. This might sound a little bit sophisticated, but the new idea of the Schröder-administration is turning away from the old model of taxation of income. The coalition wants to perform a reform model which is based on ecological ideals.

At the moment, the reform law is not yet emitted. Therefore, this paper can only reflect the ongoing discussion about the introduction of the reform plan. The government already has presented the proposal of the law of taxation relief for the years of 1999/2000/2002 .The financing committee will have its third public audience on the 19^th of January 1999.

Aims of the income tax reform

The aims of the tax reform are the enforcement of the business location of Germany in order to combat unemployment, more fairness in taxation and a simplification of tax laws. The reform includes:

• The decrease of tax rates for income and wages

• An increase of allowance for children (Kindergeld)

• A reform of the taxation of companies in order to promote investments of entrepreneurs.

• Introduction of ecological taxes which finance the reduction of wage factor costs.

An important element of the reform of income tax is the financial relief of families and employees. This includes the gradual increase of allowance for children. The coalition proposed a verification of existing scopes in order not to contribute State transfer incomes or tax relieves to families with high income, which can afford to raise their children independently. The allowance for children should be orientated at the actual costs of living and is adapted to the evolution of those costs. Because of the transition to the individual taxation including the consideration of the family income, the increase of allowance for children is financed by taxes.

Then, costs for children assistance should be also considered in the tax reform. Low and middle incomes of families should be relieved by increasing the tax-free existence minimum and decreasing the entry tax rate. The volume of the family burden balance will be transferred from the component "wedlock" to the component "children". This means additional accountancy of periods while raising up children at the coincidence of periods of contributions and evaluation of 100 percent instead of only 75 per cent of the average salary of all insured persons.

Other aims are the extension of the pensions according to minimal incomes as durable right and the improvement of insured people with children by revalorizing the obligatory periods of contributions until the 10^th year of life up to 75 percent of the average salary.

A pension splitting system should also be introduced. This means the equivalent participation of married couples and partners living in communities at pension claims, which have been established during wedlock or partnership. The pension splitting alternates the subsistence of surviving dependents for widowed wedlock members in the long run.

According to the coalition the tax reform is financed on a solid base and considers the difficult financial situation of the Bundesländer and communes.

The relief takes place according to the step by step increase of additional taxes by publishing the new bases of taxation:

The first step of reform will be in power at the 1^st of January 1999. This step includes the following measures compared to the tariff of 1998:

• Increase of allowance for children for the first and second child from 220 DEM to 250 DEM,

• Improvement of the basic allowance from 12,360 DEM to 13,020 DEM, as decided before,

• Reduction of the entry tax rate from 25.9 percent to 23.9 percent,

• Reduction of the tax rate for corporations for detained profits from 45 percent to 40 percent,

• Reduction of the highest tax rate for commercial incomes from 47 percent to 45 percent.

The income tax tariff for the year 1999 is shaped on three stages linear progressive.

The first stage of tax reform has a result of approximately 14 billion DEM of financial relief. The financing is tax yield neutral. The first step of the grand tax reform signifies for a family with two children and an average income a tax relief of approximately 1,000 DEM yearly in 1999 compared to 1998.

The second step starts on the 1^st of January 2000.

It includes the following measures compared to the tariff of 1999:

• Improvement of the basic allowance from 13,020 DEM to 13,500 DEM

• Reduction of the entry tax rate from 23,9 percent to 22,9 percent

• Reduction of the highest tax rate from 53 percent to 51 percent

• Reduction of the highest tax rate for commercial incomes from 45 percent to 43 percent.

The income tax tariff for the years 2000 and 2001 is shaped on two stages linear progressive.

The second stage of tax reform has a result of approximately 16 billion DEM of financial relief. The financing is also tax yield neutral. The second step of the grand tax reform signifies for a family with two children and an average income a tax relief of approximately 1,800 DEM yearly in 2000 and 2001 compared to 1998.

The third step starts on the 1^st of January 2002.

It includes the following measures compared to the tariff of 2000/2001:

• Improvement of the basic allowance from 13,500 DEM to 14,000 DEM

• Increase of allowance for children for the first and second child from 250 DEM to 260 DEM,

• Reduction of the entry tax rate from 22,9 percent to 19,9 percent

• Reduction of the highest tax rate from 51 percent to 48.5 percent

The income tax tariff for the year 2002 is shaped linear progressive on two stages.

The third stage of tax reform has a result of approximately 24 billion DEM of financial relief. This relief will be refinanced with approximately 14 billion DEM. The new government thinks that a net financial relief of 10 billion DEM in the third step is realistic according to the economical effects of the tax reform. Privates people and enterprises receive tax relieves during the years 1999, 2000 and 2002 with a total volume of approximately 54 billion DEM.

This signifies for a family with two children and an average income a financial relief of approximately 2,700 DEM yearly starting from the year 2002.

An ecological  tax as instrument for reducing wage factor costs

In order to lower the wage factor costs, the new government wants to introduce an ecological tax. It is planned to reduce the rate of pension security payments. This should be an incentive for entrepreneurs in order to create new jobs. High wage factors in cost are one unattractive aspect for companies that prevents many companies to invest in Germany or even to outsource their production into foreign countries with lower wage costs. Therefore, reductions in rates of pension security contributions should be financed by taxes on the use of energy and resources. Households and enterprises are subject of this new taxation. For example, the use of electricity will be taxed additionally with 2 Pfennings per kWh for private household and non-productive companies. Companies with production will have a lower rate. There should also be a tax exemption for energy intensive industry sectors. But there is now a big discussion going on, which sectors should be excepted from the ecological tax. The European Commission has to agree to the tax exemptions. The exemption for selected companies can only be for a short period. On the other hand, the company has to reduce the environmental burden (Das Parlament, 18.12.98).Other ecological taxes include the rise of the mineral oil tax .

According to calculations of the federal financial department (Bundesfinanzministerium) results from the ecological tax plans a additional financial burden of 301 Mark for a four-person-household with an average gross income of 70,000 DEM. After the subtraction of 280 DEM of financial relief because of the reduction of pension security payments, there is an additional cost of 21 DEM (DIE WELT, 10.11.1998). The coalition is expecting for the year of 1999 11.3 billions DEM of ecological tax incomes which should be used only for the reduction of pension security payments by 0.8 percent point to 19.5 percent (DIE WELT, 18.11.1998).

The coalition also plans to make the tax law more strictly in order to cancel the loop-holes of tax fiddlers. Other cuts of tax gifts are planned for allowances of money savers (Sparerfreibetrag) to 3,000 DEM for singles and 6,000 DEM for married couples; halving of allowances for compensations of employees in case of dismissals; cancellation of pre-loss in book-keeping (post-loss still remains) after a short period of transition; strengthening of profit rules of big companies with balances.

In the year 2002 cuttings around 42 billions DEM affects the commercial sector. After considering the gross relief of 57 billion DEM remains a net relief of 15 billion DEM.

The debate of the grand tax reform

The tax reform seems to be more idealistic than realistic. The aims of reducing taxes and wage factors in cost can´t be fulfilled for the moment. As mentioned above, with the introduction of an ecological tax results an additional burden for families. The tax reform does not try to cut the spending of the State, more it tries to shift taxes from one side to the other. No tax payer can think, that the State would give him tax gifts. When the State reduces his burden, it has to take the resulting deficit from another person. Especially the taxation of energy is an additional burden for families. The steadily demanded increase of mineral oil tax would also affect people living in rural areas. Also the industry is afraid of additional energy costs. The ecological tax is only possible if there is real financial relief in taxes for companies, otherwise there would be an handicap for the international competitiveness. The debate of who will be exempted from the ecological tax is still going on. The tax reform is more and more becoming an null sum game. What one of the State´s hands gives, the other hand must collect it again. The State has no chance anymore to withdraw itself from the economy. There is no scope for neoliberal experiments like reducing taxes and speeding up the economy; this prevents treaty of Maastricht, which means no additional deficit spending out of the frame conditions.

The debate of tax reform is even getting worse: The new tax reform seems to sink like Titanic after the recent sentence of the supreme court about the taxation of families. The sentence says, that the State has to offer more tax relieves to families. This issue has created another big budget hole. Therefore, a new debate about financing problems has started. Now, some politicians demand tax increases like the cancellation of the splitting system of married couples or the increase of the value added tax.

Finally, the timetable for the tax reform

• 24^th of February 1999 decision in parliament about the ecological tax

• 25^th of February 1999 decision in parliament about the tax relief law for the other two steps

• 1^st of April 1999 introduction of ecological tax

Bibliography:

Copy of coalition treaty of 20.10.1998: Die große Steuerform: Gerechte Steuern, ökologische Steuer- und Abgabenreform

DIE WELT, 10.11.1998: Rot-Grün einig: Ökosteuer ab Januar

DIE WELT, 18.11.1998: Bei der Ökosteuer soll nachgebessert werden

Schmid, Josef (Hrsg.) / Niketta, Reiner (Hrsg.) 1998: Wohlfahrtsstaat: Krise und Reform im Vergleich, Marburg

Sörgel, Angelina: Schuld sind immer die anderen, in: Blätter für deutsche und internationale Politik, April 1998