Fiscal Fairness

'It's Time for Germany to Deliver Tax Cuts'

A recent estimate predicts a further increase in German tax revenues of €120 billion by 2018. Source: DPA
A recent estimate predicts an increase in German tax revenues of €120 billion by 2018.

Open any newspaper in Germany these days and you might get the impression that the government in Berlin was waging a heroic struggle to get the country’s public finances under control.

That would be wrong, even absurd, as a look at tax revenues since the middle of last decade clearly shows.

It all changed back in 2005. For the five years before then, tax revenues were in decline or stagnating, but they have boomed ever since. From 2005 to 2013, overall tax revenues in Germany increased from €452 billion ($605 billion) to €620 billion, a 37 percent increase and average annual growth of four percent – despite a severe slump following the global financial crisis in 2008.

All levels of German government – federal, state and local – profited from the tax windfall.  So there’s no questioning the financial sacrifice the public has paid, especially with what Germans call “cold progression” – when wages rise only to meet inflation but still force earners into higher tax brackets.

Comparing tax revenues to employees’ incomes makes this clear. Between 2005 and 2013, incomes increased less than one percent annually. In short: German taxpayers went without while the state profited. To a certain extent it was necessary to help the country out of the trap of unemployment, increasing social costs and debt. In effect, what happened in Germany is what German politicians are demanding today from their crisis-ridden partners in the European Union.

It’s time now to emphasize the debt brake is an overriding political objective, not a straitjacket.

But now it’s time for Germany’s to deliver tax cuts in return. That regional authorities overall have managed to balance their budgets is no great achievement. Moreover, with tax revenues as buoyant as they have been, there should by now be a substantial surplus to show for it. But that’s not the case, owing to a lack of fiscal discipline in many parts of the country.

This applies above all to the German federal government. If you put together pension packages as it has done – to the detriment of future generations – you are paving the way for future federal subsidies to the pension insurance fund. It undermines the balanced-budget “debt brake” that Germany added to its constitution in 2009 and destroys fairness between young and older generations.

This is happening even as tax revenue prospects are outstanding for the next few years. The most recent estimate predicts a further increase of tax revenues by about €120 billion by 2018, another hefty 3.6 percent per year.

It’s time now to emphasize the debt brake is an overriding political objective, not a straitjacket.  Substantial tax cuts are long overdue – to take “cold progression“ into account and thank citizens for their long-standing contribution to Germany’s recovery. That is the only basis for a fair social contract between the people and their government.

Karl-Heinz Paqué is professor of economics at the University of Magdeburg. He can be reached at: gastautor@handelsblatt.com

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