IN PRAISE OF TAXES
How our tax system promotes private wealth and impoverishes the community
By Nicola Liebert
[This article published in October 2009 in Le Monde diplomatique is translated abridged from the German on the Internet.]
Tax cuts and joy arises! But that could soon pass away because lower taxes mean less money for the state. This money is painfully lacking in many places. When the state must sell its silverware to take in anything, when academics of the rising generation go abroad for lack of jobs and young theater directors can see what is left for them where persons must wait months or even years for a judgment and development assistance is far below what is necessary, when day-care places are not available and universities demand tuitions and when state debts surpass 20,000 euros per person – then the question is raised whether the state really has nothing better to do than lower taxes and voluntarily renounce on revenue.
Still the state will not practice total renunciation. When politicians speak of tax cuts, they do not mean the same thing as the majority of voters (without openly admitting this). As a rule, they want to cut taxes on business profits and wealth, taxes on capital gains and the top income tax rates [1] with the soothing argument low taxes for the rich and business persons will increase their work readiness which again is good for the economy and thus for everyone. These politicians are not upset that this neoliberal dogma has been refuted. [2] They insist the wealthiest circles – the celebrated achievers – must contribute less and less to finance the community.
On the other hand, normal employees and consumers will be burdened with ever more intensively by the income tax and the social security tax. Financial advisors explain this relief of capital and burden of labor and consumption with the succinct point that capital is mobile and labor is not – as though this were a natural law and as though they did not very consciously dismantle all controls on capital transactions. Owners of capital or those earning a good salary would be driven abroad by excessive taxes. That is the reason for the tax cuts. Employees and consumers do not have that option… Unfortunately, we cannot afford tax justice in a globalized world. This argument seems to have a winning logic. But it is short-sighted if not absolutely false.
The state needs tax revenues. Socially desirable expenditures are financed with taxes. Even if no one pays them gladly, most are aware that taxes are sensible in the interest of the community. “Taxes are what we pay for a civilized society.” This saying of the former US Supreme Court justice Oliver Wendell Holmes is forged in stone above the entrance to the IRS, the American tax authority in Washington.
The principle of progressive taxation is normally valid for financing state expenditures. Wealthy persons should pay more. The wealth of the higher paid is ultimately based on their profiting from the community, from a good education, from good investment conditions and from a “civilized society.”
Progressive Taxation is Doubly Progressive
A progressive tax system contributes to redistribution between the poor and the rich. The rich one pays much comparatively and uses public institution s but not more than others. He may even pay less because he drives his car instead of taking the train and uses his private pool instead of the public swimming pool. The poor claims public services and benefits even if he hardly contributes to their financing. Such a governmentally organized redistribution is doubly sensible. It ensures the social peace and stimulates the demand for necessary goods. [3]
In the last years, the tax systems in most countries became more regressive. The top earners are relived by lower tax rates. Mammoth corporations pay less and less in relation to other taxpayers. The value-added (sales) tax so beloved among politicians is regressive – or anti-social. It raises the prices of all consumer goods. Rich households only pay a small part of their income for their personal consumption and the rest is tucked away or they buy stocks or real estate without the sales tax. [4]
In contrast, low earners spend almost all their money for daily necessities – and pay a sales tax for those necessities every time. This means the rich spend a lesser share of their total income for consumer taxes and thereby have a lower tax burden than the poor. Thus raising the value-added tax 3 percentage points to 19% as the Black-Red coalition did in 2007 was by no means socially balanced.
Normal consumers do not have a lobby – unlike other groups, namely the top earners, the firm managers and economic associations. State revenues did not collapse in the last years for no reason. In the course of the 2001 tax reform, the top income tax rates were gradually lowered from 53 to 42 percent. The property tax was rescinded in 1995. The inheritance- and the land tax are lower in Germany than in any other industrial land. The capital gains tax can be easily circumvented through shifts to Switzerland, Lichtenstein or the Canary Islands where until recently the tax authorities looked away. In any case, bug businesses hardly pay taxes in Germany.
The state reacts to the revenue shortfalls in two ways. First, it saves – mainly in expenditures for those with the most miniscule lobbies, that is on social programs, cultural promotion and education. The latter is especially idiotic because it ultimately harms the economy for which it supposedly seeks only the best. Second, it reaches into the pockets that cannot elude its grasp, consumers and employees.
Employees are asked to pay three times: as consumers through the sales tax, as wage-earners through the income tax and finally in contributions to social security. Employees in Germany are burdened with higher contribution rates than in most other industrial countries. For us, social security is everything other than social. Rather it is regressively designed as with the sales tax. In principle, a flat rate is in effect, the same rate for everyone. But independent persons and persons earning decent salaries can change to private health- and pension insurances that are mostly more advantageous for them. Even if they contribute to the legal treasury, all income above a certain level is free of social security taxes. [5] Top earners pay a lower percentage share of their income to social security than recipients of medium incomes. Our social system is mainly financed by normal earners.
That the privileged middle classes are increasingly at the end of their tether with the social state is manifest. They pick on the alleged social parasites, as in the case of the notorious Florida Rolf. [6] Very little remains in Germany of the socially sensible distribution effect that a good tax- and social system should produce.
In fact, the chasm between rich and poor is becoming greater and greater. “Germany – a tax paradise for the rich” is the title of a publication of the German union alliance. There we read: “Top earners in Germany pay less than in most countries.” [7] If businesses and the wealthy in Germany were taxes the average of OECD countries, 75 billion more euros would come into the state treasury every year. With that, the hole torn in the 2010 German budget by the bailout programs in the course of the financial crisis would be closed.
The state itself belongs to the poor. To curb the consequences of crises, the state must become heavily indebted – without having the least notion of where the revenue for the repayment will come from. The state share, the share of the public authority in the total economic output of the country fell until the current financial crisis when the state was sought again. This contradicts the Wagnerian law with which the public financier Adolph Wagner postulated the constant growth of the state because he assumed new projects would come to the state with more economic and technological development in culture, science, education and welfare.
In the course of the neoliberal revolution, lowering the state share was declared the cure-all or panacea for strengthening the competitiveness of a country. Since the state was blindly devoted to this ideology, it pulled the rug from under its feet – and offered the rich better possibilities for multiplying their wealth. Public poverty and private enrichment of owners of capital prove to be two sides of the same coin.
This is very clear with corporate taxation. Step by step, the corporate tax rates were lowered since 1990 from 56% on revenues and 36% on the profits poured out on shareholders to a uniform 15% that has been in effect since the 2008 tax reform. In reality, corporations pay fewer taxes than the nominal rates suggest, on average only 14% for corporation- and trade taxes instead of the 30% that is actually due. [8] The 15.9 billion euros revenue that the state gained from the corporation tax is now on the scale of the tobacco tax.
Businesses reduce their real tax burden with a series of methods. They can reduce their taxes on later profits, deducting losses from past years. Alliances are intent on a single goal; to offset profits and losses against each other so as little as possible is left for the taxman or the Internal Revenue Service. Border-crossing businesses have many possibilities of “tax shifting.” They shift their revenues between individual countries until the profits fall quite accidentally where the tax rate is the lowest. For example, they manipulate prices for deliveries between corporate subsidiaries so high revenues always seemingly arise in low tax countries and high costs fall in high tax countries or they become indebted with financing companies in tax havens and deduct the interests from the tax at home.
Economic Stimulation through Tax Evasion
What is shocking is that most of these tricks are completely legal and accepted by the state. “We use the legal possibilities to reduce taxes. The possibilities for that exist,” said a spokesperson of Ikea with disarming openness in a television report about the many tax tricks of the furniture chain. [9]
The small furniture dealer next door who does not have the option of profit shifting is burdened with a much higher tax rate than the giant Swedish merchant. He cannot compete against its low prices for fiscal reasons.
The governing secretly regard tax evasion of businesses as a terrific instrument of economic stimulation as in the “third economic package” (June 2009). The few sensible rules introduced to limit the most popular tax tricks in the 2008 tax reform including the so-called tax limit to make tax shifting abroad difficult were loosened for several years. The businesses greatly affected by the financial crisis are not helped by the tax gifts since they do not make any taxable profits. This is all the same to the tax investigators from politics and economic associations.
Some politicians seem to regard protecting tax evaders as a helpful instrument for enhancing the location. According to a Spiegel investigation, tax auditors in Hesse were put on a short leash or even dismissed with very questionable methods. [10]
In the age of globalization, all states see themselves in a worldwide location competition for potential investors who are offered very favorable conditions. The result is a classical “race to the bottom,” a race for the lowest taxation of owners of capital. In the EU, the average business tax rate fell from 36.8% to 23.2% between 1998 and 2008. [11] It is like an open-air concert in the park. One stands on tiptoe to see better and the others follow. At the end, everyone sees just as badly as before and is very uncomfortable… The richest speck of the earth has a trifling tax rate.
In reality, a policy of low taxes is the purest parasitism. Some authority must create the prerequisites for realizing profits with oil and other raw materials. The arising damages must be repaired. Taxes should be paid where costs are incurred – and not where a pleasant tax environment is offered.
Two things are necessary to achieve this and make our tax system more just. Firstly, the tax havens must be completely dried up and secondly the tax cutting race long regarded as “normal” must be stopped. The presupposition for both is presenting capital with the bill and relieving everyone else. Both are feasible.
The EU even has a prescription for the struggle against tax havens. The tax authorities of individual countries should be mutually informed about the capital gains of taxpayers of other countries. Such an information exchange is a tried and tested method for tracing tax evaders.
Taxes should be paid where the production occurs
The EU guideline has two disadvantages. First, it only refers to interests and not to other kinds of income like dividends or profits in selling securities and second tax havens like Luxemburg and Switzerland have to be disengaged. The first will be changed. Political pressure is needed to remedy the second problem. Whoever refuses the automatic exchange must be simply uncoupled from the international capital stream – for example through source taxes or through the threat of withdrawing licenses with branch offices in the tax havens.
Theoretically, the EU could simply end the inner European tax-cutting race through a uniform minimum tax rate. However, that was never carried out against the front of tax-dumping countries from Ireland to Estonia. For that reason, the idea of a uniform basis for assessment is discussed again. A simple idea is hidden behind this technical term: taxation where the production occurs. When an international corporation settles half of its activities in Germany (measured by sales, employees and invested capital), the German tax authority should be able to tax half of the corporate profits – even if the corporation in its tax balance sheets claims these profits were all gained at Lake Zug (near Luzerne, Switzerland).
One central advantage of this system is that a profit shift is no longer rewarding since the taxman only cares where the production occurred and not where the corporation shows its profits. Another advantage results for businesses, particularly for smaller firms without massive financial divisions. These businesses no longer need to study the tax laws of all 27 EU states and present 27 different tax balance sheets. They could now save administrative costs instead of taxes.
If a business now wants to save taxes – let’s say in Rumania with its flat tax of only 16% - it must really move there with its production – with all the consequences like corruption and poor infrastructure. Most of them would reflect carefully beforehand. Under this system, low tax rates alone would hardly attract an investor. Rather everything would now be done to offer good conditions to investors – and higher taxes to finance these conditions. That would be the end of the tax-cutting race.
If we ended tax havens and the tax competition with the described methods, the bottom would be largely knocked out of tax fraud and tax evasion. All the excuses why capital cannot be taxes as strictly as labor and consumption would be quashed. Nothing would speak against raising property or wealth taxes in Germany to the average level of other industrial countries (plus the 25 billion euros a year [12], more than was brought in by the last sales tax increase). No further tax cuts would be presented to the rich and corporations and a higher value-added tax could be rescinded. In short, the tax system would be more just.
Nicola Liebert is a free journalist and member of the Tax Justice Network.
Fußnoten:
(1) Eine Ausnahme ist, dass ab 2010 die Beiträge zur Kranken- und Pflegeversicherung voll von der Steuer abgesetzt werden können. Diese Entlastung, die vor allem den ganz normalen Erwerbstätigen zugutekommt, wurde jedoch nicht von Politikern geplant, sondern vom Bundesverfassungsgericht erzwungen.
(2) Siehe dazu Lonnie K. Stevans, "Income Inequality, Net Investment, and the U.S. Capital Stock: Is There an Equity-Efficiency Tradeoff?", "Social Science Electronic Publishing, New York, 31. 12. 2008.
(3) Siehe dazu auch Keynes' Thesen in: Karl Georg Zinn, "Sättigung oder zwei Grenzen des Wachstums", "Le Monde diplomatique, Juli 2009.
(4) Mehrwertsteuer fällt nur beim Neubau an, nicht beim Erwerb von Gebrauchtimmobilien.
(5) Für die Rentenversicherung liegt die Grenze in Westdeutschland bei 64 800 Euro und in Ostdeutschland bei 54 600 Euro und für die Krankenversicherung bei einheitlichen 44 100 Euro.
(6) 2003 schoss sich die Boulevardpresse auf einen in Florida lebenden Sozialhilfeempfänger ein, der dort angeblich das Dolce Vita am Strand genoss. Die Regierung reagierte folgsam mit einer Verschärfung der Richtlinien zur Zahlung von Sozialhilfe ins Ausland.
(7) DGB-Bundesvorstand, "Klartext, Nr. 24/2009, 26. 6. 2009.
(8) Lorenz Jarass und Gustav Obermair, "Unternehmensteuerreform 2008. Kosten und Nutzen der Reformvorschläge", Münster (MV-Verlag) 2006, und Angaben gegenüber der Autorin.
(9) "Monitor"-Sendung am 30. 6. 2005, Skript unter www.jarass.com/Steuer/A/IKEA-Steuertricks.pdf.
(10) Felix Kurz, "Amnestie durch die Hintertür", in: "Spiegel, Nr. 33, 11. 8. 2003, und Matthias Bartsch und Felix Kurz, "Chronisch anpassungsgestört", in: "Spiegel, Nr. 29, 13. 7. 2009.
(11) KPMG, Corporate Tax Rate Survey for 2004 und Corporate Tax Rate Survey for 2008.
(12) Stefan Bach, "Vermögensbesteuerung in Deutschland: Eine Ausweitung trifft nicht nur Reiche", in: "DIW Wochenbericht, Nr. 30, 22. 7. 2009.
