Dusseldorf Income tax is considered a fair tax because everyone is taxed according to their individual ability to pay. All types of income should be treated equally and taxed progressively, no matter how hard or how easy it was earned.
In this way, strong shoulders carry more than weak ones; For the economist of the century Joseph Schumpeter, this was “the best achievement and the pinnacle of the liberal bourgeoisie’s art of taxation”.
Today, this efficiency principle of income taxation is derived from the general equality principle of the Basic Law (Article 3 GG). The Federal Constitutional Court has ruled several times that the distribution of the tax burden, particularly in income tax law, must be based on the principle of economic efficiency.
This principle requires that the income earned should not be used as the basis for taxation. Rather, the expenses incurred in generating the income, namely the advertising costs, are to be deducted first. Then those unavoidable expenses that reduce the individual ability to pay of the taxpayer, such as maintenance obligations, must be taken into account.
The goal: equal taxation should be equal and unequal taxation should be unequal. This is the case at least for now.
The Annual Tax Act 2022 brings innovations
Because at the turn of the year, the Annual Tax Act 2022 will come into force. It consists of a large number of individual regulations, many of which are merely editorial in nature. Some, on the other hand, raise fundamental questions.
The state has spent a lot of money on relief payments.
(Photo: dpa)
For example, the state aid from the gas price brake should be considered income for some citizens and thus become taxable in principle. However, there should be an exemption limit, which does not refer to the amount of the aid, but to the total taxable income.
For private individuals who have to pay the “solidarity surcharge, the taxable income increases by the relief,” according to a formulation aid from the Federal Ministry of Finance. This should ensure social balance, since higher earners would also benefit from the gas price brake.
However, a look at the income tax law shows that there are exactly seven types of income in Germany:
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Income from agriculture and forestry
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commercial enterprise
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independent work
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Non-self-employed work
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capital assets
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Rental
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lease
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Precisely specified other income such as Riester pensions, certain maintenance payments, parliamentary allowances or private capital gains
So far, there is nothing in the relevant paragraphs about state benefits as a basis for taxation. It doesn’t matter whether it’s building child allowance, an e-car premium, subsidies for energy-efficient renovation of real estate or other state benefits, from which middle class and high-income households often also benefit.
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All such subsidies and perks were not and are not income within the meaning of the law. And rightly so, no one in the previous government came up with the idea of declaring the gains in purchasing power from the temporary reduction in VAT in the second half of 2020 as taxable income or – this summer – the savings from the nine-euro ticket.
Does the Treasury have to pay back its income?
Even if gas customers save money if the VAT on that fuel falls, this does not count as income. The national accounts record this reduction as “subsidies to companies”.
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This ensures an effect on the consumer price index and the inflation rate is shown to be lower. Solely “the one-off relief for pipe-bound natural gas deliveries to end consumers” is now “other income” within the meaning of the tax law.
The result: in the future, two taxpayers with previously the same taxable income will be considered to have different levels of performance. This applies if one pays 4500 euros less than the market price for his new e-car due to the state subsidy, while the state takes the same amount from the gas bill for the other. It is difficult to imagine that such unequal tax treatment of state aid would stand up to scrutiny by the Federal Constitutional Court.
It is possible that Federal Finance Minister Christian Lindner (FDP) or his successor will have to return the expected income of 850 million euros to the taxpayers at some point. In addition to the not inconsiderable collection costs, the tax authorities are therefore threatened with high follow-up costs for objection processing and legal disputes as well as possibly the reimbursement of the assessed tax revenue, plus interest.
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 German Council of Economic Experts and an adviser to several federal and foreign governments. You can find out more about the work of Professor Rürup and his team at research.handelsblatt.com.
And this is how it came about: For understandable reasons, the federal government granted citizens billions in discounts during the current energy price crisis. The Ifo Institute estimates the total aid from the three aid packages that have been decided so far with their large number of individual measures at 135 billion euros. In addition, there is a relief of around 56 billion euros due to the gas and electricity price brake. This corresponds to almost 2300 euros per inhabitant.
Tax justice is left behind
However, the abundance of uncoordinated individual measures means that it is hardly comprehensible which population group is relieved to what extent and which may even benefit from the crisis and the political responses to it. The opaqueness of the interaction of the aid gives rise to a vague feeling of injustice among some politicians and not a few citizens, because supposedly wrong groups of people, i.e. the wealthy, are also favored. This prompts reflex demands for higher burdens for high earners.
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However, because there is no majority for open tax increases within the government or in the Bundestag and Bundesrat, recognized and proven tax principles are being distorted in order to achieve the political goal – at least in appearance. This – to put it in a balanced way – pragmatism in terms of tax policy has meanwhile even found a supporter in the Advisory Council.
Tax justice falls by the wayside. Consistency takes the place of arbitrariness.
Instead of deciding on targeted direct aid for those in need, the traffic light government is trying to compensate for undesirable distribution effects with the help of special tax rules. Intervention spirals occur in order to meet resistance from interest groups.
But a bad law doesn’t get better by enacting a new tax law to correct unwanted side effects. On the contrary, a failed law often turns into two bad laws in this way.
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