In the financial world Germany has a reputation of having a complex tax system, and even amongst the normal tax payers there is a belief – not unfounded – that Germans pay a lot of tax.

After all, there is a tax on being a member of a Church, a tax to support German re-unification, even a tax on coffee!

But in the end, it is the income tax, or Einkommensteuer, that is most feared.  After all, it is not easy to calculate.  Here we do not have a simple tax band system with a tax-free base income – we have pages worth of tables instead.

What really does not help, is the “cat and mouse” game of trying not have to pay so much tax.  Whereas other country collect less tax in the first place, Germany collects more and then gives you ways to deduct particular expenses occurred from it – at least in part.  There are whole books full of details of what can be deducted to help the taxpayer claim as much back as possible.

These are things like claiming back the cost of getting to work, the cost of learning a foreign language to further your career, or even – if you have the right type of job – how you can recover the cost of playing tennis!

But of course, these books only contain the legal tips on how to save paying so much tax.  These obviously do not go far enough for some high-earners, which is why they opt to take their money abroad.

Which leads me to the current debate about whether Germany should purchase data about the Swiss bank accounts of alleged tax-evaders, evoking memories of a similar case two years ago with data from Lichtenstein.

How much Germany stands to gain from obtaining the data depends on which source you read, most agree that it will be at least €100 million.  But the real debate is about how this data made it out of the banks concerned and which law should therefore prevail.

Obviously if someone has transferred their money out of the country and not declared this on their income tax form, then the state has a valid interest in claiming the unpaid tax.

But on the other hand, Germany has also seen its fair share of Data Protection issues involving major companies, and would itself be none too pleased if data from German banks ended up with a foreign power.

So people are starting to ask whether by buying the data, Germany is supporting data theft in Switzerland, whilst some politicians claim that it would an “obstruction of justice” not to pursue the information that has been offered.

Either way, there are reports of people correcting their tax returns and suddenly paying up to avoid prosecution, so just by announcing the fact that the data is out there may have helped increase Germany’s tax revenue this year!

BBC News reported today about an idea circulating in Germany about higher taxes for the rich.  There is talk of a 5% “wealth tax”, which in theory would mean the most wealthy German residents helping to stabilise the economy.

I don’t believe it would work, and it is probably the wrong way to go about solving the economic problems here.

Why it would not work

It is very difficult in Germany to pass laws that only affect part of the community.  So you can tax people for driving a car for example, and you can give tax relief for driving an environmentally friendly car, but you cannot really offer car tax relief for someone on low income.  If they afford the car, then they can afford the tax!

The best example recently was the rule that you could only claim back tax on the cost of getting to work if you had to travel more than 20km each morning.  Anyone living closer lost out.  It took a couple of years and several court cases to get the rule revoked and tax rebates paid out to thousands of people.

In fact, income tax is one of the few taxes that I know of that has different bands rather than just percentages.

So the chances are, that someone somewhere would try to get a “wealth tax” that only affected people with a certain amount of capital overturned, because it was not treating the entire population equally.

Either that or the entire population would have to pay and even those with little savings in the bank would end up contributing towards the financial recovery in a way they would prefer not to.

Why it is the wrong way

The bureaucracy in Germany is extensive to say the least.  Surely there must be room for improvement here and ways of saving money without cutting services.  In fact, I have heard all sorts of ideas about this from the main political parties over the last 10 years, but none seem to come to fruition.

Instead of increasing taxes, it would be better to help companies improve their turnover – resulting in the long run for more income for the state.  In my opinion, increasing the VAT rate a few years ago was not the right decision.

Give the people money in their pockets by not taking it out in the first place, and the chances are that they will spend it or save it to earn interest.  Either way, it will be taxed.

What you may not know…

… is that Germany already has a wealth tax (Vermögenssteuer) – except that it was declared unconstitutional in 1995 and although it still exists in the tax statutes, it is not applied as present.

If the new Government really does want to re-introduce it, then they will have some hard thinking to do first.

Zündwarensteuer was a tax in Germany applied to “Zündwaren” – things that can make fire.

The tax was originally introduced in 1909 and applied to matches, but in 1919 it was also extended to lighters.

It was discontinued in 1981.

To hear a simple explanation and a short discussion in German, listen to the podcast:

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