Skatteudvalget 2006-07
SAU Alm.del Bilag 199
Offentligt
389164_0001.png
Stefan Bach
Tax Reform in Germany:
Cutting high tax rates
on labor, business and capital income,
increasing consumption taxation
Danish Embassy Berlin
June 19, 2006
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Boost economic performance:
The sick man of Europe recovers
– Remarkable economic growth
• 2006: +2.7 % real GDP y/y change
• Robust upturn expected 2007 & 2008 (+2.4 %)
• After 4 years of paralyzing stagnation
– Despite or because of the reforms?
• First of all: Regular business cycle
- Ongoing export boom
- Sustainable wage moderation, improvements in productivity,
strongly increased competitiveness
- Rebound of private consumption, despite VAT increase
- Backlog demand in private and public investment
- Neutrality of monetary and fiscal policy
• Structural reforms remain at top of agenda
- Labor market, social security, tax system
Stefan Bach
19.06.2007
Tax Reform in Germany
2
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Major tax reform issues
– High burden on labor income
• High social security contribution (SSR) rate
• Strong income tax progression
– High tax rate on business profits
– Tax reform agenda
• Unburden wage income, taxing consumption
• Reforming and re-financing social security
• Business tax reform
- Tax cut and base broadening
Stefan Bach
19.06.2007
Tax Reform in Germany
3
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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High tax burden on labor income
– High social security contribution (SSR) rate
• 39.8 %
- Pension: 19.9 %, Health: 14.0 %, Unemployment: 4.2 %,
Long-term care: 1.7 %
• Levied on wage income up to an income threshold:
- Pension, unemployment: Euro 63,000
- Health: Euro 43,000
• Exemptions for marginal employment up to Euro 400 per
month (“minijobs”)
• Self employed, civil service are basically not covered
– Strong income tax progression
• 15 % - 42 % > Euro 52,000 taxabl. income,
45 % > Euro 250,000 taxabl. income
• solidarity surcharge 5.5 %
Stefan Bach
19.06.2007
Tax Reform in Germany
4
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Social Security Contributions (SSC), Wage Tax, Employees
1970 to 2008
SSC rate, tax rate, in %
50
West Germany
45
Average wage tax and SSC
burden (left scale)
mill. employees
50
Germany
45
40
40
SSC rate (left scale)
35
30
25
35
Total employees
(right scale)
30
Employees liable to SSC
(right scale)
25
20
20
15
15
10
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Year
Stefan Bach
19.06.2007
Tax Reform in Germany
5
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Income tax schedule 1992, 1995, 1998 and 2005
Marginal and average tax rate as % of taxable income
50
marginal tax rate
40
1998
30
2005
1990
20
1990
average tax rate
1998
2005
10
0
0
5
10
15
20
25
30
35
40
45
50
55
60
65
taxable income, 1,000 Euro
DIW
Berlin 2007
Tax Reform in Germany
Stefan Bach
19.06.2007
6
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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VAT/General Sales Taxes in Selected OECD Countries
Tax system
2006
Standard Reduced
rate
rate
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
EU VAT
16
19,6
21
19
20
15
25
25
22
17,5
21
20
16
21
19
22
19
19
20
7
2.1; 5.5
6; 12
6
10; 12
3; 6; 12
-
6; 12
8; 17
5
4.8; 13.5
4; 10
4; 7
5; 12
4.5; 9
7
5
-
5; 15
Tax rates 2006 in percent
Zero
1)
rate
no
no
yes
no
no
no
2)
yes
yes
yes
yes
yes
yes
no
no
no
yes
no
no
no
Tax revenue
as percentage of GDP
1995
2000
2003
2004
Country
European Union
Germany
France
Belgium
Netherlands
Austria
Luxembourg
Denmark
Sweden
Finland
United Kingdom
Ireland
Italy
Spain
Portugal
Greece
Poland
Czech Republic
Slovak Republic
Hungary
Other Europe
Norway
Switzerland
Turkey
6,5
7,5
6,7
6,3
7,7
5,2
9,4
9,3
7,9
6,7
6,9
5,5
5,1
7,1
7,3
6,3
6,3
8,2
6,8
7,5
7,3
6,9
8,0
5,6
9,5
8,9
8,3
6,7
7,3
6,5
6,0
8,0
8,1
7,1
6,6
7,4
10,1
6,4
7,2
6,9
7,3
7,9
5,6
9,6
9,2
8,7
7,0
7,1
5,9
5,9
8,1
8,6
7,4
6,4
6,7
9,9
6,2
7,4
7,1
7,3
7,9
6,0
9,7
9,2
8,6
7,0
7,4
5,9
6,0
7,9
8,5
7,5
7,4
7,7
10,9
VAT
VAT
VAT
25
7,6
18,0
8; 13
2.4; 3.6
1; 8
yes
yes
no
8,7
3,3
7,0
8,7
4,0
7,8
8,6
3,9
8,2
8,5
4,0
7,1
Stefan Bach
19.06.2007
1) Zero rate: Besides export trade, tax is applied at a rate of zero to certain domestic sales, including input
tax credit.- 2) Newpapers.- 3) Foodstuffs and parts of other necessities are usually tax exempted.- 4) In
some provindes harmonized provincial and federal VAT of 15 %.
Sources: BMF
Tax Reform in Germany
(2007); OECD (2007); European Commission (2005).
7
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Tax Reform of the Great Coalition 2007
– “Haushaltsbegleitgesetz 2006”
– Increase standard VAT rate from 16 % to 19 %
• Reduced rate remains at 7 %
– Additional revenue of about 1.2 % GDP
– Reduction of social security contribution (SSC)
rate by 1.6 %-points on balance
• Reduction of unemployment rate by 2 %-points
• Increase of pension rate by 0.4 %-points
– Budget consolidation
Stefan Bach
19.06.2007
Tax Reform in Germany
8
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Distributional effects of the VAT/SSC reform by income decile
without and with behavioral adjustment of savings and consumption
Deciles net
equivalent house-
1)
hold income ,
inequality measures
VAT reform
without
with
VAT/SSC reform
without
with
behavioral adjustment
behavioral adjustment
of savings and consumption of savings and consumption
Effect on tax revenue
bill. Euro
% GDP
16 623
0.77
14 972
0.69
5 460
0.25
3 808
0.18
Change in tax burden
2)
relative to disposable household income
in percentage points
1 decile
nd
2 decile
rd
3 decile
th
4 decile
th
5 decile
th
6 decile
th
7 decile
th
8 decile
th
9 decile
th
10 decile
Total
st
1.68
1.51
1.45
1.39
1.38
1.33
1.29
1.25
1.19
0.97
1.26
1.51
1.36
1.30
1.25
1.23
1.20
1.16
1.13
1.07
0.88
1.13
1.27
0.78
0.55
0.43
0.42
0.34
0.29
0.25
0.29
0.35
0.41
1.10
0.63
0.40
0.28
0.28
0.21
0.17
0.13
0.17
0.25
0.29
Stefan Bach
19.06.2007
1) Equivalence scale: square root of the number of household members.- 2) Net
household income plus other earnings (e.g. from household production, from refunds
on purchases, from daily allowances).
Source: German Income and Consumption Survey (EVS) 2003; own calculations.
Tax Reform in Germany
9
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Distributional effects of the VAT/SSC reform by income decile and
occupational status of the principal earner with behavioral adjustment of
savings and consumption
Deciles net
equivalent
household
1)
income
Self-
empoyed
Civil
servant
White-
Blue-
collar
collar
employee employee
Unem-
ployed
Private
Pensio- Other non- house-
ner
employed holds
total
2)
Shift in tax burden relative to disposable household income
in percentage points
1 decile
nd
2 decile
rd
3 decile
th
4 decile
th
5 decile
th
6 decile
th
7 decile
th
8 decile
th
9 decile
th
10 decile
Total
st
2.31
1.49
1.47
1.23
1.30
1.18
1.15
0.97
0.97
0.81
1.00
1.78
1.33
1.23
1.20
1.15
0.99
0.96
0.97
0.87
0.76
0.89
0.10
- 0.26
- 0.44
- 0.52
- 0.52
- 0.57
- 0.49
- 0.55
- 0.55
- 0.44
- 0.48
- 0.04
- 0.25
- 0.30
- 0.28
- 0.31
- 0.37
- 0.37
- 0.45
- 0.49
- 0.17
- 0.34
1.36
1.20
1.18
1.09
1.02
0.88
0.83
0.98
0.70
0.61
1.14
1.32
1.27
1.23
1.19
1.20
1.22
1.13
1.18
1.07
0.88
1.13
1.61
1.43
1.36
1.07
1.23
1.09
1.30
0.97
1.20
1.07
1.40
1.10
0.63
0.40
0.28
0.28
0.21
0.17
0.13
0.17
0.25
0.29
For information: private households in 1 000
Total
2 218
1 635
11 222
6 498
2 071
12 645
1 821
38 110
Stefan Bach
19.06.2007
1) Equivalence scale: square root of the number of household members.- 2) Net household income plus other
earnings (e.g. from household production, from refunds on purchases, from daily allowances).
Source: German Income and Consumption Survey (EVS) 2003; own calculations.
Tax Reform in Germany
10
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Economic effects of the tax reform 2007
– First-round reduction of net household incomes
•
•
•
•
by 1.3 %-points: VAT alone
by 0.4 %-points: VAT/SSC reform
slight increase in inequality measured by current income
higher burden for households paying lower SSC
- unemployed, employees in “marginal jobs”, pensioners, self-
employed, civil servants
– Labor supply increases by 110 000 people (full-
time equivalent)
• 70 000 women, 40 000 men
• upper bound of the possible employment effect
- wage adjustments or demand-side rationing effects
Stefan Bach
19.06.2007
Tax Reform in Germany
11
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Statutory Tax Rates on Corporate Profits in International Comparison 1982-2005
Company/Subsidiary level, excluding taxation of distributed profits at the shareholder level
including sub-central and local government income tax rates
70%
65%
60%
55%
50%
45%
40%
35%
30%
25%
20%
Average EU 15
Germany - distributed
profits
1)
Average 19 OECD Countries
2)
Germany - retained profits
1)
1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
1) As of 2001 uniform tax rate on both distributed and retained profits.- 2) EU 15 excluding
Denmark and Luxembourg, including Australia, Japan, Norway, Canada, Switzerland and
USA.
Sources: IFS London; OECD; own calculations.
Stefan Bach
19.06.2007
Tax Reform in Germany
12
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Statutory Tax Rates
1)
on Corporate Profits (Company Level) 2006
Central
government
corporate
income tax
rate
2)
Sub-
Combined corporate Change in combined corporate
System of Corporate Income
central
income tax rate
Taxation (domestic shareholders)
income tax rate
gov. corp.
income tax
2006/
2006/
2006/
% level
rate
3)
2000
1991
1985
%
2006
1991
Germany
%
%-points %-points %-points
17.0
-
-
-
-
7.5
4.25
-
2.5
-
-
-
-
-
-
-
14.6
-
6.6
14.0
11.6
-
-
9.8
4.9
38.9
34.4
34.0
29.6
25.0
30.4
37.3
35.0
27.5
30.0
28.0
26.0
28.0
12.5
29.0
28.0
21.3
30.0
39.3
36.1
39.5
30.0
33.0
30.6
6.1
100.0
88.4
87.4
76.1
64.3
78.1
95.8
90.0
70.7
77.1
72.0
66.8
72.0
32.1
74.5
72.0
54.8
77.1
101.0
92.8
101.6
77.1
84.8
78.5
-8.8
-3.4
-6.2
-5.4
-9.0
-7.1
-4.0
0.0
-7.7
0.0
-4.0
-3.0
0.0
-11.5
-11.0
0.0
-3.6
-3.0
-0.1
-8.5
-1.3
-4.0
0.0
-4.4
0.1
-14.5
0.4
-5.0
-5.4
-14.0
-9.0
-10.6
0.0
-12.1
-4.0
-10.0
-14.2
-2.0
-27.5
-17.0
-22.8
-8.7
-19.2
1.0
-0.3
-10.4
-9.0
0.0
-9.3
-0.4
-20.0
-15.6
-11.0
-12.4
-35.0
-14.6
-9.1
0.0
-27.6
-10.0
-12.0
-34.2
-32.4
-37.5
-15.0
-23.0
-8.7
-16.0
-11.0
-9.0
-16.6
-19.0
-12.0
-17.5
-1.8
classical, relief
classical, relief
classical, relief
classical, relief
classical, relief
classical, relief
classical, relief
part. imputation
classical, relief
part. imputation
classical, relief
classical, relief
classical, relief
classical
classic., ex.
classic., dit
classical
part. imputation
full imputation
part. imputation
classical, relief
classical
classical, relief
classical
full imputation
part. imputation
classical, relief
part. imputation
classical, relief
full imputation
classical, relief
part. imputation
classic., ex.
classic., ex.
classical
full imputation
Country
Germany
France
Belgium
Netherlands
Austria
Luxembourg
Italy
Spain
Portugal
United Kingdom
Denmark
Finland
Sweden
Ireland
Greece
Norway
Switzerland
Turkey
United States
Canada
Japan
Australia
New Zealand
Mean (unweighted)
Standard Deviation
26.375 (25.0)
34.4
33.99 (33.0)
29.6
25.0
22.88 (22.0)
33.0
35.0
25.0
30.0
28.0
26.0
28.0
12.5
29.0
28.0
8.5
30.0
35.0
22.1(21.0)
30.0
30.0
33.0
27.6
6.4
classical, relief
classical
part. imputation part. imputation
part. imputation part. imputation
full imputation
full imputation
full imputation
full imputation
Stefan Bach
19.06.2007
1) Non-targeted central, sub-central and combined statutory corporate income tax rates. Where a progressive rate structure applies, the top marginal
rate is shown.- 2) Statutory (flat or top marginal) corporate income tax rate, measured gross of a deduction (if any) for sub-central tax. Where a surtax
applies, the statutory corporate rate exclusive of surtax is shown in round brackets ( ).- 3) Combined (average) state/regional and local statutory
corporate income tax rate, inclusive of sub-central surtax (if any).
Sources: OECD Tax Database (2007); IFS (2007); KPMG’s Corporate Tax Rate Survey (2006); BMF (2007).
Tax Reform in Germany
13
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Statutory Tax Rates on Corporate Profits (Company Level) 2006
in the New EU Member Countries
Corporate Income Tax Rate
Country
%
Poland
Czech Republic
Slovak Republic
Slovenia
Hungary
Estonia
Latvia
Lithuania
Cyprus
Malta
% level
Germany
48.8
61.7
48.8
64.3
42.8
30.8
38.6
38.6
25.7
90.0
49.0
System of Cor-
porate Taxation
(domestic
Change
2006/2000 shareholders)
%-points
2006
-11.0
-7.0
-10.0
0.0
-1.4
1)
0/-2.0
-10.0
-9.0
-19.0
0.0
-6.8
0.8
classical, relief
classical, relief
classic., ex.
classical, relief
classical, relief
classic., ex.
classic., ex.
classical, relief
classic., ex.
full imputation
19
24
19
25
16.64(16.0)
1)
0/24
15
15
10
35
19.1
7.0
Mean (unweighted)
Standard Deviation
1) Tax rates on retained/distributed profits.
Sources: OECD Tax Database (2007); KPMG’s Corporate Tax Rate Survey; BMF (2007).
Stefan Bach
19.06.2007
Tax Reform in Germany
14
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Reform Agenda on Business Taxation
– High statutory tax rates
– Effective tax rates and tax revenue only lower
– Manifold tax planning schemes at the expense of the
internal revenue
• Hidden reserves, tax accounting policy
• Profit shifting to abroad
-
Via:
transfer pricing, holding services, cross-border financing,
royalty management, leasing
– Domestic distortions
• Legal form, financing (debt over equity), investment decisions
– Complex and complicated tax law, high compliance and
administration costs
– Tax enforcement must be improved
Stefan Bach
19.06.2007
Tax Reform in Germany
15
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Reform proposal Great Coalition
– Substantial decrease in tax rates
• Tax burden of corporations reduces to below 30 %
- Reduction of corporate income tax to 15%
- Reduction of local business tax rate
• Final tax on capital income of 25%
– Broadening the tax base by fighting tax avoidance
• Earnings-stripping procedure against excessive external
debt financing
• Provisions against profit shifting via relocation of high
profit functions to abroad
• Abolition of declining-balance depreciation
– Nearly revenue-neutral
• Tax deficit Euro 5 bill., 0.2 % GDP
Stefan Bach
19.06.2007
Tax Reform in Germany
16
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Conclusion Business Tax Reform
Proposal
– Reducing statutory tax rate to 30 % reasonable
• Meets European and international tax competition
• Reduces incentives for tax avoidance
– Broadening the tax base rather discretionary
• Infringes tax neutrality and equality
• Tax law becomes more complicated
– Business tax reform still at the agenda
• Local business taxation
• International coordination of business taxation
- EU common tax base
- Coordination of transfer pricing and tax competition
17
Stefan Bach
19.06.2007
Tax Reform in Germany
 SAU, Alm.del - 2006-07 - Bilag 199: Referat af Skatteudvalgets studietur til Berlin den 18. - 20. juni 2007
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Thank You for Your Attention!
Stefan Bach
19.06.2007
Tax Reform in Germany
18