The state receives around three quarters of its tax revenues from four types of tax: income, value-added, energy and trading taxes. Common to most other levies, such as dog, hunting and inheritance taxes, is that the amount of revenue generated bears no relation to the administrative expense.

In total, the German tax authorities collect some 20% of the nation’s economic product, or more than 55 bn euros in taxes from Germany’s citizens and corporations. If contributions to social insurance schemes are included, the tax burden runs to almost 40% of GDP. The main purpose of taxes is to generate revenues to pay for public goods and other tasks performed by the state. Increasingly, taxes are also expected to influence the behaviour of the population. The ecology tax is supposed to save energy, the possibility of deducting workmen’s bills from income tax is intended to promote the trades and crafts.

Last but not least, taxes serve the purpose of redistribution. Income tax burdens those with high earnings more than low earners, not only in absolute amounts but also in percentage terms. Since the state needs ever more revenues, however, the higher rates have now begun to apply to medium incomes. Hence, if performance is to be better rewarded, people must be able to keep more of their pay. Lower tax rates benefit the state, too, since when the economy becomes stronger, tax revenues increase as well.

Martin Beznoska

Dr. Martin Beznoska

Economist for Financial Policy and Tax Policy

Tel+49 221 4981-736

Mailbeznoska@iwkoeln.de

@mbeznoska

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Tobias Hentze

Dr. Tobias Hentze

Senior Economist for Financial Policy and Tax Policy

Tel+49 221 4981-748

Mailhentze@iwkoeln.de

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