NCPA - National Center for Policy Analysis

German Tax Reformers Hit Their Stride

April 26, 1996

American tax reformers feeling melancholy over recent setbacks can learn something from watching the German experience: just wait until things get really desperate. After years of high taxes and socialized government, tax reform is popular.

  • Ten years ago, with great strain, Germany rolled back top income rates from 56 percent to 53 percent.
  • German economists said that was enough, and disparaged deeper tax cuts in the U.S.
  • Reunification changed the rosy outlook.
  • Tax increases pushed the marginal rates up to around 60 percent for individuals and higher for companies.
  • Deductions for shipping caused investors to put hundreds of millions into a losing industry.
  • Payroll tax hikes funding an aging population ran labor costs to the highest in the world.

The result has been the worst economic crisis since the birth of the German Republic. The country has lost thousands of jobs. Taxes are the biggest obstacle to doing business in Germany, according to one consultant. Last year unemployment hit 10 percent and the country was in its second recession in three years.

Now, things are changing as tax reformers are starting to get a hearing.

First, the Constitutional Court ruled that an effective tax rate of over 50 percent -- quite common in Germany -- is unconstitutionally confiscatory. Then, in March, voters in three big states unexpectedly endorsed the idea that government's take from citizens should be limited to one-third of their income.

Last week a taxpayer lobby and the civil servants' trade union demanded a slimmer tax structure. This year, the reform-minded Free Democrats will push to end two especially brutal levies: a trade tax on firms' assets, which is collected regardless of profits, and a wealth tax, which burdens both companies and families.

While bolder tax cutters draw strength from American models like the flat tax and the Laffer curve, some of the best models for lower tax regimes come from closer to home. A century ago, the top Prussian progressive tax rate was 5 percent.

Source: Amity Shlaes, "Tax Reform Takes Root In Germany, Wall Street Journal, April 26, 1996.


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