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GERMAN TAX POLICY– A ROLE MODEL FOR BRAZIL?
International Seminar on Tax Systems
São Paulo, June 4th, 2018
Dr. Katja Rietzler
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Overview
1. German Economy / Tax and social security system
2. Germany has an inequality problem- Large low pay sector- Income distribution- Wealth distribution
3. Inequality and taxation: recent trends and current problems- Progressivity of the tax system- Income taxation- Wealth taxation- Social contributions
4. Plans of the new federal government
5. Reform options for a more equitable tax system
6. Summary
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Stable GDP growth (% over previous year)
-8
-6
-4
-2
0
2
4
6
Source: Destatis.
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Rapid budget consolidation after the economic and financial crisis (Data in % of pot. GDP)
-8
-6
-4
-2
0
2
4
6
8
10
12
14
16
18
20
36
38
40
42
44
46
48
501
99
1
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
20
17
Structural balance (right axis)Structural revenuesStructural expendituresStructural primary expenditures
Source: Destatis, Federal Ministry of Finance, Federal Ministry of Economy and Technology, own calculations.
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Tax-to-GDP ratio slightly above OECD average (%)
Source: OECD Revenue Statistics 2017.
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Relatively high social contributions (%)
So
urce
: OE
CD
Re
ven
ue
Sta
tistic
s 2
017
.
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Large low pay sector(Low pay earners in % of total employees).
0
5
10
15
20
25
30
Source: Deutscher Bundestag (2017).
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Income distribution has become more unequal since the 1990s (Gini-Coefficient)
0,411
0,499 0,490
0,247
0,2890,290
0,20
0,25
0,30
0,35
0,40
0,45
0,50
0,55
Market income
Disposable income
Source: Horn et al. 2017.
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Very unequal wealth distribution (share of total wealth in %)
9
0
10
20
30
40
50
60
70
1st-5th deciles 6th decile 7th decile 8th decile 9th decile 10th decile
HFCS 2014
HFCS 2014 plus imputation
Source: Bach et al. (2018), DIW DP 1717.
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Unequal wealth distribution compared to other EU-countries (top share in % of total wealth )
0
10
20
30
40
50
60
70
LV DE CY EE AT IE PT euroarea
FR LU HU SI MT ES FI NL IT BE GR PL SK
Top 5%
Top 10%
Source: ECB, 2nd wave of the Eurosystem’s Household Finance and Consumption Survey (HFCS).
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Total system partly regressive (2015 data)
Social contributions
Direct taxesVAT
Taxes on energy consumption
Taxes on alcohol, tobacco, betting
Other taxes
Source: Bach et al. 2016, p. 61.
% of house-hold income
Percentiles (household equivalised gross income)
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Progressivity and redistributions measures of the Tax system in 2015
Direct taxes
Indirect taxes
Social contributions
Taxes Taxes and social contributions
Progressivity measures
Kakwani 0.343 -0.205 -0.014 0.104 0.048
Suits 0.412 -0.218 -0.069 0.137 0.039
Redistribution measures
Musgrave-Thin
1.085 0.960 0.988 1.049 1.045
Reynolds-Smolensky
0.051 -0.024 -0.007 0.030 0.027
Source: Bach et al. 2016 (p. 60)
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Summary: Progressivity of the German tax system
1. Income tax (including solidarity surcharge) is highly progressive.
2. Indirect taxes are strongly regressive.
3. Social contributions are regressive, but less so than indirect taxes.
4. Total taxes are regressive at the bottom of the distribution and progressive at the top.
5. If social contributions are taken into account, the total is regressive for the very bottom and the top 15%.
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Tax Reforms 1998-2015 favoured the top
5,4
3,73,4 3,2
2,4
1,50,9
-0,6-0,3
-2,3-3
-2
-1
0
1
2
3
4
5
6
1.Decile
2.Decile
3.Decile
4.Decile
5.Decile
6.Decile
7.Decile
8.Decile
9.Decile
10.Decile
Average: 0,1 %Top 1 %: -4,8 %Top 0,1 %: -4,1 %Bottom 5%: +6,5 %
Source: Bach, Beznoska, Steiner (2016)
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Top marginal income tax rates (%)
0
10
20
30
40
50
60
70
80
90
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2013
2015
Germany France AustriaUnited Kingdom USA EU* Median
Source: OECD, IMK, Germany including solidarity surcharge, EU excluding Bulgaria, Croatia, Cyprus, Lithuania, Malta, Romania.
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Income tax burden (incl. solidarity surcharge) – change relative to 1991 in % (inflation adjusted)
-12%
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 201710000 20000 40000 60000 80000 100000 150000 200000 500000 1000000
Single person
For different gross incomes Source: own calculations.
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Wealth taxation
- Burden sharing (“Lastenausgleich”): Levy on wealth to finance compensations for losses during World War II (until 1982)
- Wealth tax (1% on net wealth exceeding DM 120,000) until 1996. Since then suspended because of a Federal Constitutional Court ruling declaring it unconstitutional because of inconsistent valuation methods across assets.
- Inheritance and gift tax: Tax rates of up to 50% and exemptions of up to € 500,000 depending on the degree of relationship. 2009: far-reaching exemptions for business assets. 2014: ruled “unconstitutional” i.a. because of excessive privileges for large transfers. 2016: reform to comply with court ruling; mutually offsetting elements – no real tightening
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Recurrent taxes on wealth and estate, inheritance and gift tax (% of GDP)
0,0
0,2
0,4
0,6
0,8
1,0
1,2
1,4
Germany
OECD-AVERAGE
Source: OECD Revenue Statistics.
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Inheritance and gift tax in % of the wealth transfer before deductions (year of tax assessment)
0
2
4
6
8
10
12
14
16
2002 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Total wealth transfers
Gifts
Source: Destatis, own calculations.
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Inheritance and gift tax: effective tax rate(tax/wealth transfer before deductions*100 in %)
9,0
12,9
14,4
11,6
7,6 8,0 8,0
5,9 5,4
1,3
8,4
12,814,3
11,5
7,3 7,5 7,4
5,6 5,4
1,3
9,4
12,7
14,3
11,7
7,5 7,8 7,96,9
5,5
3,4
0
2
4
6
8
10
12
14
16
< 50 000 50 000 -100 000
100 000 -200 000
200 000 -300 000
300 000 -500 000
500 000 -2.5 Mill.
2.5 - 5Mill.
5 - 10Mill.
10 - 20Mill.
20 Mill.and more
Average 2014Average 2015Average 2016201420152016
Wealth transfer before deductions Source: Destatis, own calculations.
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Social contributions could be lowered, if non-insurance benefit were financed via taxes
Social insurance branch Euro billion (in 2016) % of GDP
Statutory pension scheme 48.5 (26.1) 1.5 (0.8)
Public health insurance 28.7 0.9
Federal employment agency 3.3 0.1
Total 80.5 (58.1) 2.6 (1.8)
Social security funds provide numerous services/benefits for the wider public beyond their insured members: e.g. extra pension benefits for mothers, contribution-free insurance for spouses and children in the health insurance, support for handicapped people.
If non-insurance benefits for the wider public were financed via taxes contribution rates could decrease by 6.7 pp (4.7 pp).
Source: Meinhardt (2018)
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Plans of the new SPD-CDU/CSU government fortaxes and social contributions (2017-2021)1. Raising the child benefit / child allowance (€ 3.5 billion)
2. Home building child benefit (€ 2 billion).
3. Abolishing the solidarity surcharge (a surcharge on income and corporation tax of 5.5 %) in several steps beginning in 2021 (first step 2021: € 10 billion).
4. Abolishing the withholding tax on interest earnings.
5. Lowering the contribution to unemployment insurance by 0.3 pp (€ 10.2 billion – three years).
6. Lowering minimum health insurance contributions (self-employed).
7. Equal health insurance contributions for employees and employers.
8. Lower social security contributions for low wage earners.
9. Full health insurance contributions for recipients of basic social security (€ 28.8 billion – three years).
Non-priority measures:
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Distribution effects of an abolition of the solidarity surcharge
0 0 0 0 1 47
10
16
62
0
10
20
30
40
50
60
70
1stdecile
2nddecile
3rddecile
4thdecile
5thdecile
6thdecile
7thdecile
8thdecile
9thdecile
10thdecile
Source: Bach/Harnisch (2017)
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Reform options for a more equitable tax system
1. Integration of the solidarity surcharge into the tax scale –ensures a progressive income taxation and needed revenues.
2. Replacing the tax exemptions for business asset in the inheritance and gift tax code by a deferral or shares without vote for the government.
3. A wealth tax for the very top of the distribution.
4. Better than lowering social security contributions only at the bottom and creating further incentives for low-paid part-time jobs: using tax revenues to finance non-insurance benefits, which would allow to reduce contributions by 6.7 (4.7) pp.
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Summary1. Germany needs to address its inequality problem (large low-pay
sector, increased income inequality, high wealth inequality). Tax policy is only one of the instruments.
2. Recent tax reforms generally increased inequality by raising indirect taxes, lowering top marginal rates, lowering wealth taxation (no wealth tax since 1997, substantial tax exemptions for business assets in the inheritance and gift tax).
3. Envisaged measures of the new government are insufficient and partly counterproductive. This is particularly true of the phasing-out of the solidarity surcharge – the most progressive tax in the system.
4. High incomes and high wealth need to be taxed adequately.
5. As social contributions burden low incomes much more than income tax, a higher share of social security funds should be financed via (direct) taxes.
German tax policy is not the best role model for Brazil.
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Additional information
Slides: Katja Rietzler: German Tax Policy – A Role Model for Brazil?
https://www.boeckler.de/pdf/p_2018_06_04_tax_policy_rietzler.pdf
Factsheet (German Tax System):
https://www.boeckler.de/pdf/p_2018_06_04_factsheet_rietzler.pdf
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