Reintroduction of the Property Tax is a Threat to the German Economy

Reintroducing the property tax would further reduce the fiscal attractiveness of Germany as well as competitiveness of German companies, particularly when it comes to medium-sized firms. These are the findings of a survey including burden calculations conducted by the Centre for European Economic Research (ZEW) in Mannheim.

Furthermore, it is questionable whether the legislative authority will be able to dispel doubts concerning the consistency with the constitution of the property tax, and to achieve the intended ambitious revenue target. If individual federal states want to adhere to reissuing the property tax despite these concerns, they should be allowed to do so. However, those federal states that are not willing to accept the expected adverse effects should not be subject to national law.

Starting in 2004, the States of North-Rhine Westphalia and Lower-Saxony, governed by the Social Democratic Party of Germany, are planning to reintroduce the property tax at a rate of one per cent. Their target is to generate an annual revenue between eight and nine billion euros. According to the state governments, tax exemptions worth 300,000 euros are planned for solitary persons, 600,000 euros for married couples, 200,000 euros per child, and a special tax exemption worth 2.5 million euros should apply for operating assets. Real estate and operating assets are factored into total assets with 80 per cent of their current market value. The implications of this proposal for the fiscal burden of companies in Germany as well as an international comparison have been simulated using the "European Tax Analyzer", which was developed in cooperation between ZEW and the University of Mannheim.

Fiscal Burden of German Companies is Increasing

For a typical company of the manufacturing industry in Germany, the total fiscal burden is increasing by 3.4 per cent; other sectors would be facing increases between 0.6 per cent in the transport sector and 24.8 per cent in the construction sector. The extremely high burden on the construction sector is due to the branch’s weak profit situation. As a result, an additional capital-based tax carries considerable weight. The chemical industry would also have to expect a comparably high load increase of 3.6 per cent due to the high equity ratio in this sector. This is an example of the discrimination of equity financing that a property tax covering net assets constitutes. In particular start-ups face increasing tax loads as they require a high equity base when entering into business.

From the perspective of medium-sized companies, the tax burden on the private capital provided by associates is also an important factor, next to the tax burden on company assets. If shareholders are factored into the calculation, the effective tax burden for medium-sized companies would increase by 8.5 per cent. Percentage-based, medium-sized companies would be facing a tougher increase than publicly held companies, despite planned high individual tax exemptions.

International Attractiveness of Germany as a Business Location is further Decreasing

In international comparison, the fiscal burden on German companies is high, despite the substantial tariff reductions implemented in the 2001 tax reduction law. The property tax would more than cancel out the reductions delivered by that law. In contrast to today’s legal position, German corporations would be subject to a higher fiscal burden than a similar company in the US (the advantage of the US based corporations would increase by 0.3 per cent to 3.7 per cent) after the introduction of the property tax. Compared to France, the present advantage would be reduced by nearly 50 per cent (from 9.6 per cent to 5.6 per cent). The existing advantages in favour of British and Dutch companies would continue to increase (from 25.2 per cent to 38.3 per cent in the case of Great-Britain and from 17.6 per cent to 25.5 per cent in the case of the Netherlands). These calculations have not even accounted for the additional burden of the scheduled tax preference reduction tax. Finally, with the reintroduction of the property tax, Germany would go against the international trend towards harmonization within the European Union. Within the 15 EU Member States, capital companies are not subject to property taxes. In the past 20 years, taxes independent of revenue have been decreased to a minimum in many countries. Important examples are the abolition of the tax on business capital in Luxembourg, Austria and in Germany, together with the recent deletion of the private property tax in the Netherlands. 

Doubts Remain as to Constitutional Consistency and Revenue Targets

Besides competitive disadvantages for German companies, the constitutional consistency of the property tax is still in question. The efficient assessment of operating assets and real estate demanded by the property tax requires the review of current market values at any given point in time, which would present an extremely tough challenge for administration. Furthermore, fiscal access of the exchequer is restricted by the tax rule of splitting total income of husband and wife. Because of the top income tax bracket of 49.6 per cent in 2004 including the solidarity tax contribution, there is only a narrow scope for action. Finally, it remains a secret how a tax revenue twice as high as in 1996 could be reached with distinctly increased tax exemptions but nearly unchanged tax rates, not taken into consideration an estimated 350 million euros of additional assessment costs within fiscal authorities per year. Hence, a property tax at the federal level can by no means be recommended. Nevertheless, each federal state government has the liberty to introduce the property tax despite these disadvantages. In case of success, the other federal states will follow suit. If success does not come, the failed experiment would be limited to one federal state, instead of affecting the whole of Germany.

Contact

Dr. Gerd Gutekunst, E-mail: gutekunst@zew.de

Prof.  Dr. Robert Schwager, E-mail: schwager@zew.de

Prof.  Dr. Christoph Spengel, Telefon: + 49 (0)621/1235-142, E-mail: spengel@zew.de