Giving Till It Hurts

If it weren't for the "Tax Song," Germans would have nothing to smile about at all in these days of economic doom and gloom. The brilliant parody of the "Ketchup Song" which targets Chancellor Gerhard Schröder's tax policies is probably the least of his worries at the moment.

With the country already straining under one of Europe's highest tax burdens -- counting all direct and indirect taxes and levies it stands at 56 percent on national income -- Social Democratic-led states are proposing the introduction of yet another tax.

More costs

The wealth tax initiative, these states say, would generate around €20 billion ($19.8 billion) in annual revenues. The 1 percent tax would be levied on companies whose assets exceed €2.5 million and on individuals who own more than €1 million in property, cash and investments. However, detractors say the wealth tax will create more problems than it solves.

"The costs and bureaucracy involved will far exceed the expected revenue gain," Professor Winfried Fuest, tax expert with the Institute for Business Research in Cologne told DW-WORLD. "As the tax hasn't been in place since 1997, you would have to reassess at least one million businesses and individuals," he said.

Constitutional problems

The tax was ruled unconstitutional and abolished in 1997 because it ran against the principal that the state must not take more than half of any citizen's income.

Professor Fuest says there are other problems, too. "Constitutionally, the tax should only apply to assets that are sold by businesses and not to those they hold."

For medium-sized businesses -- which form the backbone of Germany's economy -- who are already suffering from the stifling array of taxes, the wealth tax creates an additional burden. "The majority of medium-sized businesses in Germany has a thin capitalization of around 7 percent on average, so paying a wealth tax on top of their other taxes is going to hurt them even more," said Fuest.

Businesses set to leave

Fuest thinks the threat by many businesses to leave Germany in light of the increasing tax burden could become reality sooner rather than later. "There are many ways for these companies to relocate their capital, be it through offshore organizations or moving their assets to tax-free havens," Fuest said.

While Social Democratic state premiers like Sigmar Gabriel of Lower Saxony argue that the additional revenue would go toward boosting the education budget, critics such as Professor Fuest say this is nonsense as German tax law does not allow for special provisions on how tax revenues are to be allocated. Instead, the generated income is thrown into one big pot and then apportioned among the federal government, state governments and municipalities.

Too many taxes

A look at Germany's convoluted revenue-sharing taxation system shows that there are around 30 different types of taxes, the most important of these are federal taxes such as personal income tax laws, corporate income tax laws and value-added tax laws.

Many analysts say the laws are misguided and are stifling economic recovery. For example the relatively high taxation of labor compared with capital income tax is cited as a reason for the lack of job creation in Germany.

Overhaul

With bankruptcies reaching a record high in Germany this year, businesses are calling for more flexibility on the labor market and above all no more tax increases.

"There must be more equality in the tax system, " said Herman Franzen, the president of the German Retailers Association." "The tax burden must be reduced to below 40 percent and we need a radical overhaul of the whole taxation system," he added.