Tuesday, February 7, 2012

Taxes and Public Duties

Just a graph showing what your obligation towards the government is if you live as a single in Germany.

This is taxes and public duties added together. It's in German, but I guess it is understandable. Remember that 1€=$1.30 right now.

Even though taxes here are rather low, the public duties (social insurances) are pretty high. And they have exactly the same effect on an indivudual. You have to pay and you get something back in return. That's why I added them together in the graph.

Remarkably, these taxes and public duties aren't really all that much progressive once you reach 45k a year. Which is not all THAT much. You can easily earn 45k Euros a year the moment you have a reasonable degree in the natural sciences, economics or law.

Even more remarkable is the comparison to the US: Germany has considerably lower unemployment (about 5.5%). And while there are certainly some special reasons within the Euro crisis, our "job creators" don't seem to mind paying some 44% taxes and public duties. And if you earn more than 250k € you actually have to pay 45% marginal tax rate. Unless you make all your money with investments in the financial markets: in that case it is 25%, 66% higher than in the US where it is 15%. Oh my god: the economy is going to collapse !! ;)


  1. I found it very interesting when I found out that the top income tax bracket in the United states until 1980 was 70%. No, that's not a typo. So I guess the US was a communist, evil, anti-economy system for most of the cold war, and we just never noticed.

  2. Definately different in the US. If you have one of those degrees, you would be extremely lucky to get a job in those fields in the next 20 years.

  3. @flosch: In 1945 it was 94%, and for much of the 40s and 50s it was 80-90%. Those were different times, when we still acted like one country, rallying together to accomplish something important, like killing Nazis and eventually, going to the moon.

  4. Out of curiosity, is it fair to include social insurance payments in any tax comparisons? Unlike general taxes, it is considered that you statistically should 'get it back' at retirement age - and mostly tax free too.

    Hard taxes on the other hand are pure transfer mechanisms and are the part that is considered progressive or not.

    1. It's not exactly the same at all times. But it's the same when it comes to how much money you get from your business/company at the end of the month and after the government stepped in.

      Furthermore, social insurances are not private insurances, because they wouldn't work, or work very badly (health care, unemployment, retirement) and just for a few persons (those who need these insurances the least).
      So, there's always some kind of transfer idea behind a public social insurance and in that it's quite similar to taxes.

      On the other hand, you often get your taxes back in the form of streets, a working government, a strong military, etc.

      So, yes, there are differences but I think, economically, they aren't very meaningful. The distinction is mostly for historic reasons. But that's my personal opinion.

    2. I stand corrected. In the US, social security benefits are reduced based on additional income amounts over and above a defined limit; so yes they're quite progressive at withdrawl. Is Germany the same?

      This gets more muddled than my brain can handle. So I guess you could view it as enforced saving/insurance at one end (probably up til 45k), while it works its way into pure transfer/subsidization above that.

      Progressive, in my book has always been wealth transfer. So, if I was making a graph to demonstrate progressivity, I would take that portion of social insurance for which expected utility is zero, and only put that towards the count. That'd have the effect of increasing the slope of the curve would it not? It's a bit of some hand-waving I agree, but we were already attempting to stack different things.

      This does make cross-country comparisons more work, because you'd have to dig deep into each benefit and limitations to determine what the expected utility was for each bracket. My gut says the US, UK, and Germany have similar curves (each getting there slightly differently), while some other nations currently facing troubles have another set. But that's just pure conjecture and maybe someone out there has already looked at it.

  5. Nils, and compare that to the US. In the US we can easily reach above 55%! Yes that is 10% HIGHER then Germany. In the US we have federal income taxes, FICA (social security), medicare, state income taxes, local income taxes and propterty taxes. A self-employed person making around 75K US per year in the state of Illinois will pay 49.8%. And you rapidly hit 55% as you approach 250K per year.

    Then on top of that you have sales tax, gasoline tax, tax on cable, electricty, gas, gasoline, use tyaxes, toll road fares etc etc. When all is said and done 60% or even more goes to some form of tax in the US.

    See years back the top rate was 70% and they lowered it. But they RAISED every other stinkin tax to compensate for that. And NO you will NOT get all your SS funds back unless you make less than 50K per year.

    So no wonder Germany is doing betteer than the US. You have a lower tax obligation. Something the US should learn and enact. Lower and flatter taxes.

    1. I need to add something. In your chart it looks like even those making 20K euros still pay 20% or something like that. In the US if you make 25-30K per year you get back MORE than you paid in through the earned income tax credit. That's correct its a big wealth transfer system. So your actual federal income tax rate is NEGATIVE.

      Now compare a negative return to 15-20% that people get on investment income (which was already taxed TWICE before). Again when the top tax rate was 70% the bottom was around 10%. It sure wasn't negative.

    2. Consider the value added taxes of 19% in Germany. We also have a tax on gasoline: about 60%.

      Anyway, I have no doubt that there are ways to pay much more taxes in the US. The system is rigged by interest groups.

      However, are you honestly claiming that the US government spends a higher percentage of total GDP than Germany if you ignore the deficit?? You can easily check this ...

    3. If you have less than (about) 750€ a month available, the German society will make sure you have at least this here. It't not part of the taxes, however. It's social security.

      If you make no money here and can 'prove' that you can't find a job you can get about 750€ (very rough guess - the details are complex!) until you die.

      Goodmongo .. are you arguing that the US is much more socialist than Germany right now ? :)

    4. Why would anyone ever agree to a flat tax rate when the marginal utility of money is not flat?

      Also, Goodmongo, someone filing as Single has to make LESS than $13,660 after deductions (so basically < $19k) to qualify for the Earned Income Tax Credit. Kids bump the number up, but they are also expensive liabilities for the first two decades so at most it's a wash. Meanwhile, I'm paying the exact same gas tax, sales tax, etc, as you despite my dollars literally costing me more (higher marginal utility) than yours with your $75k salary. Tell me how that is "fair."

      I am all for revising the bloated tax code. But when the dust settles, I want to see 70%+ top-bracket rates return. Anything less is privatizing the gains and socializing the losses. That is simply untenable in a world where the US's GDP is higher than it was 3-4 years ago with 5-6 million less people working.

  6. Investment income is not taxed twice Goodmongo, its a popular talking point, but people often miss the mechanics. The investor is not taxed twice, he/she only takes the 15% hit. The "double tax" comes from corporate taxes, which for many companies is well below the nominal rate of 35% because of the loopholes and deductions. Take GE for example who recently paid Negative corporate taxes. Investors who put their money in GE got taxed once at a Negative rate for corporate taxes and 15% in capital gains. So total effective tax rate is less than 15%. This doesn't just happen for GE, there are loads of other companies that have corporate tax rates that are Negative or extremely low, (Exxon for instance) making their total real tax rate extremely low.

    This really exposes the point that real tax rates are based on how well your particular industry can lobby for corporate tax loopholes and deductions.

  7. Also according to the Wall Street Journal, the average corporate tax rate for fiscal year 2011 (ending Sept. 30) was 12.1 percent. That's roughly a third of the nominal rate and the lowest effective corporate tax rate on record in 40 years.

    This puts the taxes for the average investor for capital gains + corporate taxes at less than 30%. So saying that the income was taxed twice is not entirely accurate.

    1. Deferred tax benefits and depreciation recognitions. The actual tax rate is what the government always get when looking at it holistically.

      Never ever use effective tax rate when talking about macro-economics. Only use it in politics or when you're talking about short term cash-flow.

  8. It is taxed twice. First off you need money to invest. You got that money after paying a tax on it (either income or estate). Now you invest money. The dividends are after tax money from the corporation. So the end result is dividends are like interest on money you already paid taxes on.

    People hate the 15% on capital gains but never complain about the 0% on municipal bond interest. So there is selective outrage.

    Nils, I'm not saying the US is socialist but it is not the tax haven people make it out to be. In fact the US has a higher corporate tax rate then the other G8 countries.

    What we need here in the US is a flatter and lower tax rate. No deductions or loopholes that allow GE (and other all crony capitalist companies) to pay zero. No government payouts to crazy losing companies like Solyndra or bailouts to GM/Chrysler. A simple fair low tax rate that everyone pays into. And I even support some type of national sales tax. After all why not get some criminal paying something when they spend their money?

  9. "First off you need money to invest. You got that money after paying a tax on it (either income or estate). Now you invest money. The dividends are after tax money from the corporation."
    Just like we have income (taxed) and then consumption (taxed again). Or maybe we have income (taxed), gifted to someone (taxed again), who spends it (taxed again), the revenues from which are (taxed) and so on. You can always pick out a particular dollar and say it was taxed again; given time, everything gets taxed any number of times, trending toward an infinite repetition.

  10. Goodmongo: dividends are considered taxable income not capital gains. So the investor pays income tax on dividends. How much they pay is based on their tax bracket obviously. Dividends are payed out on corporate profits which have already undergone corporate tax. It has nothing to do with the investor's initial investment, that never gets taxed twice. So the investor him/herself only gets taxed once. The argument is that the company cant offer as high of a dividend because of corporate taxes. But as Klep pointed out, its really not a double tax because the money is being used for a different purpose.

    If we used the same argument, if I buy something from my local retail store, should they not get taxed on that income because the person that bought the item (me) already paid an income tax on it?

  11. In the great rotten state of Illinois our governor last year raised income taxes by 67% (in addition to other taxes being raised). A number of large corporations said they were leaving the state. The governor then gave them an exception or other tax break so they would stay.

    Don't you see the problem here? The ones that get hurt with these tax raises are the small to middle level business and individuals. Its a game to them. they get the progressives to think raising taxes are a good thing but the big guys get out of it. Only the little people get crushed.

    A small flat tax rate that everyone pays with no exceptions is much fairer then some illusional progressive high tax rate that never in fact taxes the so called rich.

    And NO I shouldn't have to pay additional taxes on money that I earned that was already taxed once. The primary reason for sales type taxes is to capture income from those that bypass other taxes (like criminals), except it double hits other people.

  12. Without entering the POLITICAL debate, I am entering the discussion regarding its application to MMORPG economies ;)
    Flat taxes are the only type that work (hello G.E.). Napoleonic code (minus his own exception).
    But I never understood sales tax. It's a concept that slaps the poor more than the rich, considering the cost of common goods. Sure, the rich (and middle) *can* buy higher priced goods, but that doesn't mean they *do*. It's a 'keeping the honest honest' system: it's borked.

    1. You can differentiate sales tax depending on the kind of good. For example basic food can not be taxed, a normal car can be taxed at 20% and a swimming pool in your garden, or your private jet can be taxed at 50%.

      Actually, sales tax is my favouriate tax for this simple reason. But explaining it in detail would require its own post ;)

    2. There is one major downside to this. Not long ago in the US there was a luxury sales tax that was placed on yachts. The unintended consequence was the workers making yachts in Florida all got fired as the rich bought their yachts in Europe. The industry in the US got hit very hard by this type of luxury sales tax.

    3. Quite correct, Goodmongo. You would have to tax imported yachts at the same rate. But this is probably a problem for the WTO. And that's why this otherwise superior tax system will not be implemented in the next hundred years in the EU/US :).

      Also consider this: By taxing only consumption and not taxing production, a country becomes very competitive overnight. It's great for exports. But unfortunately, in a globalized world, it just doesn't work without some kind of substancial import tariff.

      Finally: Taxing consumtion would be MUCH more fair than taxing the accumulation of money (which is easily 'printed'). It would do away with the whole inheritance-problem.
      But, as I said, it's a topic for another post ;)

    4. You've detailed a great theoretical system!
      Problem? It's theoretical. Communism is great in theory too! I'm talking about application.
      The other caveat is one that apparently went unnoticed: basic goods. If I'm a rich man, and buy modest things (like the majority of self-man rich men do- it's a common plunder to assume that people who have money spend money on luxuries), then a sales tax affects me the same as a poor person. Difference? I have peace of mind that the poor man doesn't because of the mountain of Deutsch Mark that lines my pillow at night.
      When talking about practical, applicable systems, percentages are the only way to do justice when considering 'fairness'. Criminals escaping income tax, for example, has nothing to do with the tax system in question, than it does with whether or not a tax system should be even applied (free markets).

    5. If I'm a rich man, and buy modest things then a sales tax affects me the same as a poor person.

      This is exactly why this kind of tax is so fair :). You get taxed for what goods and services you receive from society, not for what you create for society.

      As for this system being theoretical - yes. But every country nowadays is an embodiment of hundreds of very theoretical ideas. At least it seemed like that a few hundred years ago ...

      I am not asking for politicians to start working. All I am saying is: think of it! Once enough people are convinced of a purely theoretical idea they usually find a way to make it happen, anyway.

  13. I found what I was looking for - there's been a couple studies using the Suits index and Kakwani indices as measures of progressivity in tax systems. Data useful to Suits is a bit harder to come by so there more comparative work using Kakwani.

    The research below was a bit surprising for me. It doesn't include estate taxes, but you can assume they impact minor amounts of progressivity. It does however include income tax, property and wealth taxes, payroll taxes, and consumption taxes. It doesn't model clawbacks for lack of appropriate data, which was a shame.


    Surprisingly, it shows that the US is pulling away from everyone else when it comes to progressivity. The most surprising part to me is that when you add in sales taxes, all of Europe becomes regressive in its tax treatment.

    So, are Americans justified in screaming that they're having to deepen their progressive curve? Compared to the rest of the world, they're already far ahead of us, so I don't think we're in a position to judge.

    This is of course premised on whether you think progressive taxes are a good thing :)

    1. I can't access the study as you need to be subscribed to Oxford Socio-Econmic Review. However, much of Europe is regressive or has a flat tax. The only countries having clearly progressive taxes are the norhern countries, which, of course, also perform the best economically.

      If you look at countries like Greece: The wealthy basically pay no taxes and the poor and the middle class pay all the taxes.

      It's like I wrote before: The US is, in many cases, much more socialist than Europe: and it's good for them.

      However, when you look at the general level of taxation, the US is pretty low. The reason is that the government(s) spend about as much as the European governments. But half of it is financed with debt. Of course, todays debt is tomorrow's taxes and inflation.
      In the case of the US inflation, as higher taxes are never going to get through congress. Inlation, of course, is very regressive ...

    2. Odd, I probably got a subscription cookie thing when I went through their working paper draft at


      Click on the oxford journal publication link to jump to the published version - although the paper is mostly the same.

      Interestingly, it has DE, BE, and FR much more progressive than the UK, NL, SE, FI, and NO. The fact that northern europe is in that bottom cluster surprised me. Also, it would have been nice to see Greece in that survey.

      As for inflation being regressive, it is an interesting idea with some backed research. However, the disparity is imposed with the assumptions of asset liquidity and credit access. The later has been declining from about 46% in 1987 to about 25% in 2011.

      The first assumption has to be taken with a grain of salt unless you think the majority of wealth is already in TIPs or similar instruments. Wealth otherwise sitting in equity or bonds will suffer as well under inflation without wage increases.

    3. Er.. the percentage are those 'without' credit access.

  14. Forgot to mention. One of the biggest regressive costs that the liberals love is green energy. Green energy is 2 to 8 times more expensive than gas/coal/oil. If the liberals really cared about regressive taxes and costs they would be pushing for cheaper energy and not more expensive energy.

    And no CO2 or AGW/GW/climate change is NOT costing us economically.

    1. Please don't boil everything down to the US parties or 'those liberals', 'these conservatives'.
      We all know how politics in the US works. It's money and minority interest groups.

      There is no liberal agenda: there are people who profit from it. And there is no conservative agenda: there are people who profit from it.

    2. Goodmongo, I know this may surprise you, but sometimes people have multiple goals and those goals will sometimes go against each other. I want low taxes and a strong military, but the latter is expensive, so I have to choose how much I want each. It's not an "if they really cared about" issue.

      As for climate change having no economic impact, no one ever said it was going to damage much today or tomorrow. But there are places which would be flooded away entirely by too much melting. Imagine if Europe was as cold as the same latitude of North America.