The German tax system: developments and competitiveness


Germany ranks 16e on the Tax Foundation International tax competitiveness index 2019, a study that measures and compares the extent to which OECD countries promote sustainable economic growth and investment through competitive and neutral tax systems. As Germany has seen few major changes in its tax system in recent years, this ranking is relatively stable.

Looking at the different tax areas, Germany ranks above average for consumption taxes and international tax rules, on average for property taxes and relatively low for property taxes. corporate and personal income.

Germany’s ranking on the International tax competitiveness index 2019

Source: Tax Foundation, “International tax competitiveness index 2019. “

Category Score (out of 100) Ranking (out of 36)
Globally 66.94 16
Corporation tax 52.35 26
Individual taxes 60.41 26
Consumption taxes 75.93 ten
Property taxes 65.81 16
International tax system 87.23 8

Reforms for 2020 include a new tax credit for research and development (R&D), the removal of the solidarity surcharge for most income groups, various changes in the taxation of energy consumption and an overhaul the assessment of the property tax.

Corporation tax

Germany levies the third highest combined corporate tax rate at 29.8% among European OECD countries (France and Portugal have higher rates at 34.4% and 31.5% %, respectively) and the fifth highest among all OECD countries. Germany’s Economy Minister proposed to cap the combined rate at 25% amid expected declining GDP growth, but the proposal failed to find its place in the 2020 budget.

Germany has however decided on a new R&D tax credit. From 2020, companies can claim a tax credit corresponding to 25% of salaries and wages paid to research staff. The base is capped at 2 million euros (2.3 million US dollars), which results in a maximum tax credit of 500,000 euros (565,000 dollars). While R&D credits can foster innovation through R&D activities, technology transfer and entrepreneurship, they tend to benefit some firms and industries more than others, creating distortions in the economy.

Individual taxes

German employees face the second highest tax burden on labor in the OECD; only Belgium’s tax wedge is higher. A single childless worker who earns an average wage pays 49.5% of the total labor cost in taxes, and one-income families with two children pay an average of 34.4%.

To reduce the high tax burden on labor, the government will partially abolish the solidarity surcharge, a 5.5% surcharge on the income of individuals and companies initially set up to finance German reunification, participation in the war of Gulf and to support other European economies. From 2021, taxpayers in the first nine income deciles (gross income up to € 73,000) will no longer be subject to the solidarity surcharge; the next 6.5% will pay lower rates (gross income between € 73,000 and € 109,000), and the richest 3.5% (gross income over € 109,000) will continue to pay the full amount . Corporate income will also continue to be subject to the solidarity surcharge. The reform will reduce tax revenues by around 11 billion euros ($ 12 billion) per year.

In addition to the high tax wedge, the German personal income tax system is associated with a high compliance burden. Measured as the number of hours it takes a business to comply with personal income tax, Germany has the third most complex personal income tax system in the world. OECD with 134 hours per year (only Italy and Hungary require more hours). For comparison, it takes 14 hours in Luxembourg.

Consumption taxes

The value added tax (VAT) is well structured, with a rate of 19%, roughly the OECD average (19.1%); a compliance burden much lower than that of the personal income tax at 43 hours per year; and a relatively large tax base at around 56 percent of final consumption.

As part of the German Climate Action Program 2030, train travel will soon be subject to the reduced 7% VAT rate and the aviation tax will be increased. In addition to various tax incentives for environmentally friendly initiatives such as energy retrofitting of buildings, the tax base for the motor vehicle tax will be adjusted to depend primarily on carbon emissions from 2021.

Property taxes

Due to a constitutional decision, Germany will reassess the tax base of all 36 million properties in the country. According to the proposal, the new rules will be income neutral. However, the property tax obligations of some taxpayers could change.

Conclusion

Policies such as high tax burdens on labor, comparatively high corporate taxes and an overly complex personal income tax system make the German tax system less competitive and can hamper sustainable economic growth. The abolition of the solidarity surcharge for most income brackets will partly lighten the tax burden on employees. Similar reforms, particularly in the area of ​​corporate taxation, would be essential to improve Germany’s international tax competitiveness.

Was this page useful for you?

Thank you!

The Tax Foundation works hard to provide insightful analysis of tax policy. Our work depends on the support of members of the public like you. Would you consider contributing to our work?

Contribute to the Tax Foundation


Previous Thousands of Israelis now consider Germany's capital their home: NPR
Next Virus cases reported in 41 schools in the German capital