Monika Schnitzer and Michael Hüther: Do higher taxes make sense?

Ms. Schnitzer, Robert Habeck and Christian Lindner have fallen out when it comes to budget planning. There is too little money for too many projects. How can this be solved?
carver: Relying solely on debt financing is not going to work. So there are two solutions. Those in government need to prioritize what to spend the money on. That can narrow the gap in the budget a bit. However, this will not allow it to be closed. The second option is more income. However, tax revenue will not increase by itself because Germany has hardly grown at all for four years. On the contrary: the energy crisis has made Germany massively poorer. Someone has to wear that.

So you want to raise taxes?
carver: In the Advisory Council, we spoke out in favor of a temporary increase in the top tax rate or the introduction of a temporary energy solis. On the grounds that the energy price brakes that have now been launched are not sufficiently accurate. Higher earners get more state aid than poorer people, although they need it more urgently. Another suggestion was to delay the cold progression balancing, which would have had a similar effect.

Mr Hüther, what do you think of the idea?
Huether: We have become poorer as an economy, yes. However, deducing the need for tax increases from this is neither economically nor politically convincing, but simply absurd. Every tax you raise means a higher burden for businesses. Raising taxes during the crisis is fundamentally wrong. Also, using cold progression as a political tool when inflation is high is not only wrong, it is a betrayal of trust.

carver: Of course, this always affects companies too – but only those that make a profit. And there have been some companies that have had terrific gains this year.

Huether: So far, companies and high incomes have not only been taxed a little here and there. At 24.5 percent, we have the highest economic tax rate since reunification. And our tax system has long been designed in such a way that the richer households and companies bear the brunt. You don’t have to drive those affected to a further loss of prosperity by making Germany even less attractive as a business location.

carver: I don’t think that tax increases limited to 2024 would immediately ruin the entire site. Studies show: A permanent tax increase of one euro reduces investments by 25 cents. Our suggestion are temporary increases. A possible negative effect is therefore manageable.

Huether: It’s just a myth that tax increases can be reliably limited politically.

carver: Most taxes have been abolished. There’s really only one tax that doesn’t: the sparkling wine tax. We regularly balance the cold progression. That’s a tax cut every two years.

Huether: And the solos?

carver: The solos? Half of it was abolished again. Also: Anyone who believed that the unit would be over in a few years was naïve. The Federal Fiscal Court also currently sees an increased financial requirement from reunification. And if you fail to make a law that includes a clear end date, then the government has failed in its job.

Huether: Ms Schnitzer, it is purely hopeful to believe that broad taxation can be reversed so easily. You can’t get out of the act, I think it’s political naivety to believe anything else.

Back to the core: Why shouldn’t targeted energy price brakes be balanced with taxes, Ms Schnitzer?
carver: People like Mr Hüther and I, we don’t need these energy aids. But we still get them and more than others because we have larger houses or apartments than people with lower incomes. As a result, more money is spent than necessary, at the expense of our children having to pay off the debt later, further fueling inflation.

Huether: It doesn’t add up to what you’re saying. You’re just pretending to be able to pinpoint accuracy with a millimeter ruler. That’s unrealistic. In view of the falling market prices for gas and electricity, it is also not clear whether the energy price brakes will play any role at all. So you want to make advance payments in terms of tax policy.

carver: I find it really astounding that conservative economists like you, who usually pay so much attention to money, now focus so little on thrift.

Huether: I think that’s absurd. Mainly because there is no concrete concept for your proposal in return. In the annual report by the Council of Experts, there is nothing more to be found than a few general sentences and no analysis of how targeted or imprecise the price brakes really are and what exactly which tax increases would change. It is shocking what political wave was staged from it.

carver: We have not submitted a concept with quantified estimates, which is also due to the fact that the gas price brake was only ready three days before our annual report was handed over. But apparently, if I listen to you, we have hit a sore point, otherwise you, as the director of an employer-oriented economic research institute, would not have to defend yourself so much.

Huether: I have to defend myself against economic nonsense. Your arguments do not convince me. The recipients have to pay taxes on the aid from the energy price brakes, that alone creates more justice.

carver: But there is always something left over for the higher earners, although they don’t need it, because we don’t have a 100 percent tax rate.

Huether: What you are saying here certainly corresponds to an attitude that is widespread in parts of society. It’s just a purely political lecture with value judgements.

carver: The fact that you categorically reject everything in which the term tax is combined with an increase is the purest form of a political value judgement. We presented economic arguments.

Huether: Nope, you haven’t.

carver: But.

Huether: No. You have to read your own text. There is nothing in it about the specific design for specific reasons.

carver: We wrote: A total package of relief for all and burdens for higher earners allows for better targeting, thus reducing the need for debt financing and lessening the inflationary fiscal stimulus. I haven’t heard an argument from you that refutes this reasoning.

The real question, apart from energy aid, is: Who bears the costs of the economic transformation in addition to the costs of the crisis?
Huether: Correct. We have underfunding in many areas, especially in infrastructure. This cannot be managed through the normal tax budget. But it’s not just a question of whether rich or poor finance it, but above all which generation is doing it. It is not fair when a generation has to do both: clean up the past and tackle the transformation. Instead of shifting responsibility back and forth with tax policy debates, we need a clear answer: investing in the future, and yes, that means financing the necessary transformation in a focused way through loans.

Doesn’t that take the debt brake ad absurdum?
Huether: It is correct that Finance Minister Lindner bypasses the debt brake and creates credit-financed pots of money. But this requires systematic criteria, now it’s uncontrolled growth.

carver: I do not think so. Our generation, Mr. Hüther, has lived very well over the past 30 years and has had to pay few taxes, for example for defense spending. Placing this missed spending through debt alone on the next generation, who will be doing more than is required to fund our retirements, doesn’t seem right to me.

Another idea from the direction of The FDP recently said that it would screw on VAT in order to finance income tax relief.
carver: I don’t think much of that, especially not in view of the food that is becoming more and more expensive anyway. That would hit the lower-income classes hard.

Huether: A uniform rate of 16 percent VAT as a replacement would indeed have major distributional effects. What we need is much more fundamental tax reform that takes the system as a whole into account.

The federal government could at least clear up the many exceptions to which the reduced VAT rate applies.
carver: Yes, without a doubt, we should work on these exceptions. The fact that a take-away latte macchiato is taxed at seven percent and a black coffee at 19 percent makes no sense. The exemptions are often arbitrary and open the door to lobbying.

Huether: I see it similarly, but it will not create large revenue margins.

This could be generated by introducing a wealth tax, which SPD chairwoman Saskia Esken is now calling for again.
Huether: Please not this discussion again. The effort is disproportionate to the income. If we want to talk about the taxation of substance, then about the inheritance tax on private wealth. It is certainly possible to have a debate about whether unearned income makes sense or not. But wealth tax? For God’s sake no, not even Frau Schnitzer would suggest that.

carver: You are right for once, Mr. Hüther. And yes, we have to get to the inheritance tax – but above all to the question of how the inheritance of companies should be taxed.

Ms. Schnitzer, Mr. Hüther, thank you very much for the interview.