After Merkel: Germany’s Tax State Faces Its Limits

The answer that many German politicians, many in the middle and certainly all those left of center, offer to address social woes in the country is to raise taxes. That is an understandable policy reflex in a country like the United States, but not in high-tax Germany, which is also a “world champion” in social security charges.

What these politicians, supposedly standing up for the common man, do not understand is this: High taxes reduce the ability of average earners to build wealth from income and reduces social mobility.

Most people paying the top tax rate on income in Germany are far from “rich.” Never mind that the prices of real estate are such that owning an apartment is out of reach of most people in “rich” Germany.

Given that over two-thirds are renters, even an inheritance boom won’t change that reality in any noteworthy fashion. In many other countries, such as the United States and also in supposedly poor, but actually asset-rich Italy, the two-thirds proportion references those owning their real estate, not renting it!

Wealth distribution remains an issue

If one looks beyond incomes and focuses on wealth distribution, one does indeed find a rise in inequality over the past decades. But it is worthwhile to look at the fundamental causes for this development here as well.

A significant proportion of the German population has few or no savings. Savings are held mostly on bank accounts, in life insurance contracts and as corporate pensions. In contrast to the owners of real estate or shareholders in corporations, they only earned meager returns over the past decade and more.

These low returns became even lower in real terms due to the low (or zero) interest monetary policies pursued in the wake of the financial and eurozone crisis.

To address the unequal wealth distribution, the proper response by politicians would be to support the middle class in Germany in their efforts to save and to invest. This starts with lowering the excessive burden of taxes and mandatory contributions to the welfare system. Otherwise, those who really need to build up a nest egg will never have the funds to do so.

German policymakers also need to be level-headed about including an incentive for a reallocation of savings into more productive areas, notably the stock market and real estate.

The country should also consider setting up a sovereign wealth fund like Norway or Singapore to invest the income from trade in a better way than in the past. In the financial crisis alone, German banks and insurance companies lost 400 billion euros.

Fighting Populism

It is obvious what needs to be done to fight the increased populism in our country:

• lower taxes

• better support of building private wealth

• reduce the economic migration of unskilled people into Germany’s over-generous welfare system.

Note that none of these policy elements have anything to do with the oft-made suggestion “to take on (or push back) the AfD,” the right-wing extremist party.

Resorting to that political charge is tantamount to having the entire German political establishment putting its head into the sand.

After all, financial support for migrants is significantly higher in Germany than in all major economies of Europe. Moreover, Germany is the only country where the actual payments to migrants even exceed the already high estimates of the tax paying population (see chart).

Perceived Government Transfers Received by an Immigrant Relative to a Native, 2017

Unfortunately, such a program does not fit into the ideological frame of the existing narrative of mainstream politicians and the left-leaning part of media. They are using doubtful academic studies – like the new Report on Populism by the Bertelsmann Stiftung to influence the public opinion.

That is not just shortsighted, but bound to backfire politically. Hard to imagine, but this approach moves the political direction of the country in the opposite direction of what is needed. Yet more social welfare and higher taxes, while at the same time flatly denying that the migration policy is a financial disaster, is a prescription for political disaster.

As rents in cities tend to rise given the growing population – also due to immigration – politicians focus on rent control. This tool will not generate more housing supply, which as anyone knows is what is really needed.

In the end, the right-wing “populists” will benefit

Higher taxes, more recipients of social welfare and no investments in the future of our country as recently explained in The Globalist means “populism” will continue to gain support. Denying the root causes for the increased frustration of the public with existing policies is not going to regain trust.

Conclusion

Making the correct policy choices to avoid a true political calamity matters greatly. The Front National in France, although renamed, is already on a nationalist/socialist path. The current Italian Government of left-wing and right-wing populists fits into the picture. The German AfD is developing in the same direction. A high price to pay for the policies of denial.