The election promises of the parties are immense: They range from substantial tax cuts to higher benefits for families, an increase in basic security and minimum wages to huge government investment packages and lower electricity prices for business and citizens.
At the latest during the coalition negotiations, it will become clear to the parties involved that the state coffers are empty and the way to higher debts is blocked by the debt brake. Because a two-thirds majority in the Bundestag and Bundesrat for a reform of the constitutional rule is not in sight.
Even if there were agreement between the potential government parties to burden top earners moderately higher, it would soon turn out that the additional income from a higher tax on the rich or a higher top tax rate would only be a drop in the ocean: a tax increase of one percentage point for the rich would bring around 600 million Euros in addition and a higher top tax rate of 1.6 billion euros per point – mind you for the federal and state governments combined.
As soon as the explorations get stuck in a dead end, many older participants will remember the difficult coalition negotiations at the beginning of the Merkel era in 2005. Back then, too, the coffers were empty – and finally the Union and SPD increased VAT by a whopping three percentage points from 2007.
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The result was one of the largest tax increases in German history, which, as we know today, laid the foundation for what would be called “consolidation” and “black zero” in the following decade. With this tax hike a year in advance, there was enough time for companies to adjust their pricing strategies. In addition, consumers were given the opportunity to prefer buying durable consumer goods – and thus boost the upswing that began in 2006 through pull-forward effects.
VAT is very productive
Value-added tax is considered a good tax by financial scientists: it hardly distorts individual decisions; because the only legal way to avoid it is to permanently abstain from consumption. It is also very productive.
Since its introduction in Germany in 1968, the volume has increased almost steadily. Within half a century, their share of tax revenue almost doubled, and revenue increased twenty-fold – until the incumbent government began to instrumentalize the tax first for control purposes and then to stabilize the economy.
However, VAT has a regressive effect, as low-wage earners consume a larger proportion of their income than higher-income earners. Therefore, the average tax burden decreases with increasing income. However, this regressivity is less than often assumed.
On the one hand, rents are tax-free, and on the other hand, the reduced rate applies to many everyday goods. Both of these are of greater benefit to those on lower incomes. A lowering of the reduced rate would therefore counteract the regressive effect of a higher standard rate.
If the reduced rate were reduced by one point and the standard rate increased by one point at the beginning of 2023, this would give the tax authorities an additional ten billion euros per year. So three points would bring an impressive 30 billion euros more income.
Germany is considered a VAT haven
There is definitely scope. Because Germany is a VAT haven in the EU. Only Luxembourg and Malta have a lower standard rate; in Cyprus and Romania the tax is 19 percent, as in Germany. The remaining 22 EU countries charge significantly higher rates in some cases.
This is one of the reasons why the cost of living in Germany is lower than in many neighboring countries. They are 51 percent higher in Switzerland and 28 percent higher in Denmark. And in the Netherlands a representative shopping basket is seven percent more expensive than in Germany, in Belgium and Austria it is five percent, and in France it is four percent.
Sure, such a tax hike would have to be well justified. The additional income should never be wasted on symbolic subsidies or clientele-specific gifts. The most pressing economic and socio-political problems include the basic security, which many consider to be too low, unemployment benefit II, and above all the way too rocky out of the poverty trap.
Prof. Bert Rürup is President of the Handelsblatt Research Institute (HRI) and Chief Economist of the Handelsblatt. For many years he was a member and chairman of the Advisory Council as well as an advisor to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
A few facts: In Germany around 4.5 million people of working age receive basic security, half of which are registered as unemployed and could therefore work immediately. Each and every one of them who would gain a foothold on the primary labor market would be a macroeconomic gain for our aging economy, which is heading for massive labor shortages. But the hurdles to taking up regular employment are high.
Only those who earn up to 100 euros a month for basic security do not have to accept a reduction in their entitlement. Those who earn more, however, have to accept deductions of 80, 90 or even 100 percent for every additional euro they earn. Such high transfer withdrawal rates demotivate those affected and force them into undeclared work. A single person only has a gross income of around 1400 euros or more, so that only the regular marginal burdens of taxes and social security contributions of around 40 percent apply.
The way out of the basic security is often blocked
In view of the minimum wage of just under ten euros, it is in fact not worthwhile to work that involves more than two hours and less than 35 hours per week. The way out of the basic security is often blocked. Without a reform of the rules on additional earnings, the substantial increase in the minimum wage demanded by the parties to the left of the center would aggravate the situation of recipients of basic income support rather than improve it.
Proposals from academia for reform are on the table. However, lower transfer withdrawal rates would be very expensive and would increase the number of beneficiaries if the tax exemption of 100 euros was retained.
The Ifo Institute has therefore calculated several cost-neutral options, which have in common that in the lowest area the net income would even fall – which, however, would not be politically enforceable, especially not by a government with the participation of the SPD.
The “employment grant” proposed by the Institute for Employment Research (IAB) runs in a similar direction. Here, previous transfers would be combined into a new social benefit. This would have the advantage that numerous people would be led out of the unpopular Hartz IV system.
A real and incentive-compliant reform of these social rules would be a project that would be good for all parties involved in the next government. In a first step, the basic security would have to be increased noticeably twice: the first time to compensate for the recent sharp rise in prices, and the second time to compensate for the consequences of the proposed increase in VAT. The economic and social politicians of the new coalition could boast of having received the principle of “promoting and demanding” with a new combination wage and of having taken an important argument away from supporters of an unconditional basic income.
If such a reform succeeds, poverty and basic social security would lose some of their horror. At the same time, taking up regular employment would be worthwhile again for many long-term unemployed.
The billions of euros from a higher sales tax would be well invested. The labor supply would not be weakened, but increased, so that the economy could achieve a higher growth path – despite the tax increase.
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