Example Of Germany Economy Essay
The German tax structure is one of the obscure and confusing tax structures for its complicated direct and indirect taxation system. The tax structure extends from dog tax and inheritance tax to value added tax and excise duties. The federal, state as well as the local governments levy taxes. Businesses in Germany are subject to various taxes, such as trade tax, corporate tax, turnover tax and many others depending on the type of the company. The German taxation system distinguishes general income tax from withholding tax. While the lowest tax rate is 14 percent for individuals earning less than EUR 8354, the highest rate is 45 percent for incomes higher than EUR 250,731 . Individuals are also subject to solidarity surcharge, which is 5.5 percent of the income tax and church tax if the individual is a registered member of the Catholic Church in Germany.
Germany has reformed its tax system in the recent years and its tax system is competitive when compared to other nations. While the GDP of Germany is $3.2 trillion, its economic freedom score is 73.8. The GDP per capita is $40,007 . The German government holds strong reforms and policies in order to keep a control on deficit spending. Though the German government has abolished the tax relief for home owners, which has led to an increase in additional revenue to the government, there is an ample space to reduce tax concessions. The German government earns a minor part of its revenue from property tax. It is important that the government increases taxes on land and buildings in order to stabilize the tax base. By making special arrangements for the poor, the government should increase property tax at the municipal level. In addition to property tax, inheritance tax and net wealth tax imposed by the German government discourage savings and encourage people to mobilize their wealth offshore .
Germany has progressed in restraining the environmental behavior by imposing environment tax. German policies aim at mitigating the changes in climate. The environmental tax reform has minor effects on the growth of GDP. Though the GDP grew after the recession, the recovery of the economy is relatively low. Export-oriented manufacturing has led to an increase in the growth of real GDP. The German government expects the GDP to reduce under 0.35 percent by 2016 and attain a balanced structural budget by the year 2020 . A substantial rise in the tax leads to an increase in the GDP. On the other hand, the fiscal policy eliminates the gap in the GDP. While the government spending affects the aggregate expenditures directly, the taxes affect the aggregate expenditures indirectly. An increase in the government spending along with an increase in the taxes raises the real GDP.
The tax changes that affect the aggregate supply result in the expansion of government spending financed by tax increases results in a greater change in GDP. In order to comply with the new fiscal rule, the German government needs fiscal consolidation. An increase in the taxes results in the fall of output causing the aggregate supply curve to shift to the left. Higher taxes lower the aggregate expenditures indirectly through consumption spending causing the equilibrium real GDP to rise . Lower tax rates allow people to allot much of their incomes from either work or investments, which create incentives for working more in order to allocate the incomes to savings and investments. Thus, the German economy would grow at a faster rate and the government could receive more tax revenue through lower tax rates from higher GDP.
The Laffer curve best determines the relationship between lower tax rates and higher tax revenue. Tax revenues fail to increase with increasing tax rates due to the reduction in total tax revenue . An increase in the tax rate doesn’t always decrease the tax revenue, nor does a lower tax rate always result in an increase in the tax revenue. It depends on the tax rate, whether it is either above or below the tax rate when the tax revenue reaches the revenue-maximizing rate. When the government increases the taxes, it in turn increases the tax burden on the individuals resulting in their incapability to live on the income. Currently, the overall tax burden of Germany is 37.6 percent of the total domestic output . Higher taxes result in less net personal incomes of the individuals as the employers fail to pay higher wages as tax becomes the highest budget item on the list. Higher taxes result in inflation due to rise in the prices of the products, which in turn affects the net personal income.
Another major consequence is loss of purchasing power. Lower taxes increase the net personal income as they encourage entrepreneurship. They offset corporate taxes in a majority of the businesses. On the other hand, lower taxes become a burden to the economy leading to a decrease in productive supply, which affect the net personal income. An increase in the corporate savings has led to a shift in the income distribution towards attaining profits. Due to the fall of governmental investments as a result of consolidation of governmental finances, the GDP of Germany has reduced when compared to that of other European countries . According to the economic experts, it is highly unlikely that there would be an increase in the GDP with lower taxes. Thus, the German government has taken all the necessary steps to control the taxes and ensure the growth in GDP, thereby improving the government spending and controlling deficit spending.
OECD. (2010). OECD Economic Surveys: Germany 2010. OECD Publishing.
Siebert, H. (2014). The German Economy: Beyond the Social Market. Princeton, NJ: Princeton University Press.
The World Factbook. (n.d.). Retrieved 03 01, 2015, from Central Intelligence Agency: https://www.cia.gov/library/publications/the-world-factbook/geos/gm.html