Taxation Madness – INSM Proposal of a VAT Reform
Berlin – In Germany, the standard rate for the value-added tax (VAT) is fixed at 19 percent. However, some business sectors managed to obtain exceptions for their goods and services, leaving them with a reduced tax of only 7 percent. Prominent exceptions include ski-lifts and, since recently, the German hotel and restaurant sector. In order to raise awareness about such arbitrariness, the INSM has launched a campaign for an easier and more reasonable tax system.
According to the Global Competitiveness Report, the biggest problems for investment in Germany arise from its complicated tax regulations and the value-added tax plays no small part in this. This is because a reduced tax for certain sectors is equal to an indirect subsidy; a substantive distortion in the market. Recognizing this, the OECD (Organization for Economic Co-Operation and Development) requests the German state to rethink its tax laws with regards to its value-added tax system.
When Germany introduced its value-added tax in 1968, it started with a standard rate of 10 percent on all goods. Only “essential” goods, such as food and newspapers, were taxed at 5 percent in order to make it easier for poor people to afford them. Today, such a system is outdated.
The "VAT Chaos Game" of INSM
A flat tax would make the system more efficient, easier to understand and even allow for tax reductions says the economist Professor Dr. Rolf Peffekoven. On April 15, 2010, Professor Peffekoven presented his study which showed that the German state could align the two different tax rates, reduce the rate to 16 percent and still save money in an attempt to consolidate its budget. With the exception of rents and leases, which would maintain their current tax rates of 0 percent, every product and every service would be taxed at exactly the same rate.
Making exceptions for “essential” goods in order to disburden poor people is a noble goal. However, in the current system one could make a strong case that big business is actually profiting more than the poor, for whom the exceptions were invented. Far from being socially unjust, the new system would free economic resources and actually stabilize the German social market economy as well as its capacity to care for those with no income.
“German Tax-Law Discourages Growth”
According to Hubertus Pellengahr, director of INSM, German tax-law is not just unfair. It is also non-transparent, discourages growth and creates bureaucracy-costs. A good place to start cleaning up the mess would be the value-added tax system, where a simplification of the tax-law could be done in a timely and efficient fashion, says Pellengahr.
In order to raise awareness about the issue, the INSM campaigned for reform with a Facebook-app “Mehrwertsteuer Casino” (value-added tax casino) or the actual “Mehrwertsteuer-Chaos-Spiel” (a value-added tax memory game). The basic principle of both games was to pair up some of the most ridiculous exceptions that lobbyists managed to push through in Berlin. Examples include books and audiobooks as well as carrots and carrot-juice, where the former are taxed at 7, and the latter at 19 percent value-added tax. As if to mock itself, the system also provides for different tax-rates when it comes to mules and donkeys. Buying a mule, the consumer is only charged with 7 percent extra, whereas the surcharge for donkeys remains at the regular 19 percent.
Approval from Politicians
INSM managed to obtain approval from most parliamentary groups, e.g. the economic council of the conservative party CDU. Recently, its president Kurt Lauk clearly positioned himself in the tax-question by demanding the current tax-exemptions to be abolished for good.
The INSM campaign also triggered extensive press coverage. Most notable, the German prime-time news show “Tagesthemen” featured the “Mehrwertsteuer-Chaos-Spiel”, in their coverage of the confusing German tax system. Clearly, such absurdity even stands out within the German bureaucratic jungle and clearly it is time for a more extensive debate, if not for decisive action.