Out of Balance

According to some critics, the austerity package passed on 7 June 2010 is a “social impertinence”, involving unrivalled “orgies of austerity at the expense of the poor”. The outrage campaigns and protest marches can now go ahead as planned in their attempts to influence the public’s sense of injustice – a tactic that has been fairly successful thus far. But this raises a number of questions, namely: Where is this supposed social imbalance in the austerity package? And how do the alternative saving measures suggested by the aforementioned critics compare?

The focus of this public outcry are the cuts being made to the financial benefits being paid out to the unemployed. For example, those receiving long-term unemployment benefit will lose the temporary supplement from a previous unemployment benefit claim (§24 SGB II), as well as the additional parental allowance and statutory pension insurance contributions. This does not mean leaving society’s most vulnerable out in the cold. Rather, these cuts serve to more strongly emphasise the principle that state benefits should not be higher than the going wage on the market and therefore to increase incentives for people to enter the workforce on the primary labour market. The current level of pension contributions only raised the pension entitlement of those affected by a minimal amount. Furthermore, those who hardly make any pensions contributions during their working life can still claim basic social security in old age or during unemployment. However, the cuts are to be made to the statutory state pension with the result that the promised reductions in pension contributions at least should be deferred to a later date. This will then largely affect employers and companies, who will also feel the force of the tax increases laid out in the austerity package (air travel tax, nuclear fuel tax, elimination of energy tax rebates, measures to force the banking sector to bear some of the cost of the financial crisis). These tax increase make up almost 40% of total savings for the year 2011.

But critics of the austerity package never have these kind of increases in mind, instead suggesting a sharp increase in both the top personal income rate and the wealth tax rate (which currently stands at zero). In their minds, the “rich” also need to shoulder a part of the burden. If we look more closely at the facts, however, this pesky argument can be quickly discarded. We have long had a tax on the wealthy, with around 10 per cent of earners contributing around 53 per cent of total income tax in Germany, while a quarter of those liable to pay income tax, due to their low earnings, pay practically no income tax at all.  If an income tax increase is to bring any noticeable returns with regard to the government’s aim of consolidation, it must be applied to the lowest bracket, that is, it must include the skilled workers that are generally coddled by almost all of the mainstream political parties. As a result, policy-makers are not willing to commit to changes in this area.

Raising the tax rate on personal wealth is a particularly popular idea, with serious suggestions of an annual rate as high as five per cent, which would reduce capital by a half in just under 14 years, without even taking inflation into account. The administrative burden for a wealth tax is also enormous, not least because there are no market prices available for real estate. Finally, the income generated from the wealth tax goes to the state governments, so this would not help the federal government to consolidate its income.

This doesn’t mean we should be optimistic or even naive enough to rule out tax increases completely. These efforts should, however, be focused on getting rid of as many of the exceptions to the 19 per cent standard value-added tax rate as possible. Furthermore, the taxation of bonuses for work on public holidays or night shifts as well as commuting allowances should be subject to review. But the current coalition government has obstructed this by being too slow to take action and they no longer have a majority in the Bundesrat.