Fundamental Reform of Income Tax: In How Far Can the Assessment Basis Be Broadened and Tax Law Simplified?

Intensive discussion is now underway on the tax reform concept put forward by Paul Kirchhof. Analyses based on extrapolations of individual tax return data from the income tax statistics show that ending the main tax concessions and allowances would not be enough to compensate for the loss of revenue from lowering the top rate of tax to 25%. Moreover, the importance of simplifying the tax system is being exaggerated in public discussion. A much simpler tax system is neither necessarily efficient nor fair. Politicians must look for reasonable compromises here. With the appointment of Paul Kirchhof, Professor of Tax Law and former Judge at the Constitutional Court, to the Union parties' competence team the discussion on fundamental reform and simplification of the German income and corporate tax system has intensified. Kirchhof has put forward the most far-reaching proposal for tax reform of recent years in a concept developed with his research group on the Federal tax code. He wants to see an almost flat rate income tax of 25% on all taxable income over euro 18 000; in return, all tax concessions and exemptions related to specific types of income would be dropped, while lump sums would be allowed for some income-related expenses and operating expenditure. The tax regulations would also be tightened and their application simplified by thoroughly systematizing and redrafting the income tax laws. DIW Berlin carried out a study of this and other proposed reforms in April 2004 in regard to the revenue they would yield and their distribution effects, as well as their effects on the supply of labour. The main conclusion was that a clear drop in the rates of tax, particularly in the upper incomes range, would cause considerable loss of revenue, and that this could not be made good by broadening the tax base or stimulating growth. The proposals by Paul Kirchhof, as well as the concept put forward by the Free Democrats, would mean that tax payers on high incomes would pay very much less tax, not only in absolute terms but also in relation to their incomes, than tax payers on average earnings, so these proposals would also lead to greater inequality of income. In view of the current discussion on the scope for broadening the tax base a consideration of the main concessions and allowances is of interest. These are shown in the tax statistics or can be estimated from (table). An extensive and representative random sample was taken from the income tax statistics for 1998 - the latest year for which data is as yet available - and the key features that are relevant for taxation policy were extrapolated to the year 2005.4 According to the forecast 29 million tax payers will be liable for income tax in 2005, of whom 14.8 million will be single and 14.2 million married couples taxed on their joint incomes.5 Simulation calculations of the income tax charged for the 2005 tax year using DIW Berlin's income tax micro-simulation model are in line with the current tax revenue and current estimates of tax. Revenue from income tax charged will be euro 171.4 billions, and revenue from non-assessed nonassessed wage tax euro 15.1 billions.

How Should Local Governments Tax Local Business?: Lessons from an International Comparison and a Microsimulation Analysis for Germany

The local business tax as the main revenue source of local governments in Germany has been under extensive debate for decades. Proposals for reform range from a broad tax base in the sense of an origin-based value-added tax to a pure profit tax that could be implemented as a surcharge on corporation and personal income tax. Local business taxation systems in OECD countries actually represent the whole spectrum between these two extremes. We use a newly developed microsimulation model for the business sector in Germany to analyse the fiscal and distributional effects of the general reform options identified, including the extension of the local business tax to liberal professionals. We also analyse the effects of the actual German business tax reform 2008 with respect to local business tax revenues.Local business tax, microsimulation, local taxation, tax reform

Effective taxation of top incomes in Germany

We exploit an exhaustive administrative dataset that includes the individual tax returns of all households in the top percentile of the income distribution in Germany to pin down the effective income taxation of households with very high incomes. Taking tax base erosion into account, we find that the top percentile of the income distribution pays an effective average tax rate of 30.5 percent and contributes more than a quarter of total income tax revenue. Within the top percentile, the effective average tax rate is first increasing and then decreasing with income. Since the 1990s, effective average tax rates for the German super rich have fallen by about a third, with major reductions occurring in the wake of the personal income tax reform of 2001-2005. As a result, the concentration of net incomes at the very top of the distribution has strongly increased in Germany. --personal income tax,taxing the rich,effective progressivity

Top Incomes and Top Taxes in Germany

We analyze the distribution and taxation of top incomes in Germany during the 1990s on the basis of individual tax returns data. We derive a measure of economic income from taxable gross income as reported in the tax returns. Thanks to complete sampling, we can deliver a very precise description of very high incomes, in terms of both distribution and composition by source. We also provide a measure of the effective average rate of taxation for various income groups. Our main findings are as follows: (i) incomes are highly concentrated in Germany, more than commonly thought; (ii) the German economic elite relies much less than elites in France or the US upon income from wages and salaries; (iii) income taxes are highly concentrated in Germany, more than commonly thought; (iv) although effective tax rates are significantly lower than statutory ones, the income tax is effectively progressive; (v) income taxation substantially reduces income inequality in Germany.Income distribution; Personal income tax; Taxing the rich

A Wealth Tax on the Rich to Bring down Public Debt?: Revenue and Distributional Effects of a Capital Levy

The idea of higher wealth taxes to finance the mounting public debt in the wake of the financial crises is gaining ground in several OECD countries. We evaluate the revenue and distributional effects of a one-time capital levy on personal net wealth that is currently on the German political agenda. We use survey data from the German Socio-Economic Panel (SOEP) and estimate the net wealth distribution at the very top, based on publicly available information about very rich Germans. Since net wealth is strongly concentrated, the capital levy could raise substantial revenue, even if relatively high personal allowances are granted. We also analyze the compliance and administrative costs of the capital levy.Capital levy, wealth distribution, microsimulation

A Wealth Tax on the Rich to Bring down Public Debt?: Revenue and Distributional Effects of a Capital Levy

The idea of higher wealth taxes to finance the mounting public debt in the wake of the financial crises is gaining ground in several OECD countries. We evaluate the revenue and distributional effects of a one-time capital levy on personal net wealth that is currently on the German political agenda. We use survey data from the German Socio-Economic Panel (SOEP) and estimate the net wealth distribution at the very top, based on publicly available information about very rich Germans. Since net wealth is strongly concentrated, the capital levy could raise substantial revenue, even if relatively high personal allowances are granted. We also analyze the compliance and administrative costs of the capital levy.Capital levy, wealth distribution, microsimulation