GERMAN TAX POLICY– A ROLE MODEL FOR BRAZIL?

International Seminar on Tax Systems

São Paulo, June 4th, 2018

Dr. Katja Rietzler

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

Stable GDP growth (% over previous year)

-8

-6

-4

-2

0

2

4

6

Source: Destatis.

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.

Tax-to-GDP ratio slightly above OECD average (%)

Source: OECD Revenue Statistics 2017.

Relatively high social contributions (%)

So

urce

: OE

CD

Re

ven

ue

Sta

tistic

s 2

017

.

Large low pay sector(Low pay earners in % of total employees).

0

5

10

15

20

25

30

Source: Deutscher Bundestag (2017).

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.

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.

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).

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)

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)

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%.

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)

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.

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.

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

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.

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.

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.

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)

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:

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)

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.

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.

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

Thank you for your attention!!!

Further information:

https://www.boeckler.de/index_imk.htm

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