Check the tax rate of the state (so that you can classify the political debate)

1000 ways to improve our lives / #51

Hello from Berlin, 

As you may know, the German economy is caught up in an economic crisis.

There is currently a heated debate among politicians about what can be done. The main opposition party (CDU/CSU) has proposed an economic stimulus package, which essentially consists of lowering taxes in various areas (e.g. inheritance, labour, electricity).

The opposition's argument: Taxes are too high in Germany, which prevents economic activity.

Beyond that, the opposition has said little. Neither what the measures would mean in terms of reduced revenue for the state nor how the stimulus package should be counter-financed, namely either through lower government spending or more debt.

Debt financing would be obvious in an economic stimulus package. Otherwise, what citizens would have more in their pockets (as a result of the tax cut) the state would have less to spend. So the balance would be zero, and so would be the short-term economic effect.

When assessing the opposition proposals, two questions arise. Has the tax burden in Germany really increased in recent years? And what about the debt level? Is there room for more debt?

To answer the two questions, let's take a step back and look at the big picture today, not at the individual types of tax (in detail, there is a need for reform at almost every corner).

Two developments are crucial for this broadened perspective.

First, the development of taxes in relation to economic output. In political disputes, arguments are often based on absolute figures, preferably those not adjusted for inflation. But if you really want to know whether the tax burden has increased or decreased, you have to put the amount of tax in relation to what a society generates (in terms of GDP). This ratio is called the tax ratio. And we see...

... the tax rate over time (I took the figures from here) provides an argument for both sides: Today, the tax total in relation to GDP is only 1.5 percentage points above the rate of 1960, and yet it can be seen that the trend has increased in recent years.

Second, if new debts are possible depends on how much debt already accumulated. Again, absolute figures mean nothing; the relationship between debts and economic output (GDP) is crucial. Because economic performance is the prerequisite for repaying debts.

So here is Germany's debt level over time (I took it from here):

As you can see, due to German reunification, the financial crisis and the pandemic, the debt ratio rose in each case and then fell again. Today it is around 70 per cent.

Compared to many other countries, this number is reasonably moderate. On the other hand: Within the European Union, only a debt ratio of 60 per cent is allowed (the so-called Maastricht criteria). So the debt level should decrease again in the future.

Conclusion: The tax burden in Germany has not increased much, nor is a debt-financed economic stimulus program seriously possible. Almost all economists, therefore, warn that politicians should do better with fundamental reforms instead of short-term economic programs.

What these reforms could look like? This is a topic in this channel but at another time. :-)

Onwards, 

Johannes Eber