Tax mania Germania – Idea for a simple tax system
The German tax laws are very complicated. Many people wish a so-called “tax declaration on a beermat”. But given the following taxation concept you only have a glass of beer left standing on the beermat!
This article is in fact a summary of the ideas in my bachelor thesis in my former studies in business informatics. In the meanwhile, I became convinced that the most taxes are theft because they are unjustifiably collected with a threat of violence. Nevertheless, I am willing to pay 5-10% of duties. This should be more than enough to pay for inner and outer security and to enforce objective moral laws what unfortunately happens not very often in Germany anymore.
Although I am a PT (prior tax payer or perpetual traveler) and don’t pay direct income taxes anymore I surely still have to pay more than 30% tax in the most countries due to indirect taxation (included in the price of production factors; service tax and so on) and consumption taxes. And I would pay so many percentages even if I would get back the sales taxes (VAT)! Here you already see that a consumption oriented tax law is more effective. But even under other aspects it makes even more sense than the current German tax law. And if there have to be taxes anyway then please first implement a smart, fair and transparent tax code.
In this article, my goal is also to sensitize you for the taxation you don’t see or which is not called tax. I want us to just for a moment set apart all those official terms and supposedly fair special rules to become free to see the big picture. Because only if we understand how our monetary and economic system works – and (German) tax laws are a part of it – we can act economically reasonable and can free ourselves financially. I want us proverbially to see the forest and not the trees. I am anyway absolutely incompetent regarding details in the tax law. Tax law was by the way the only subject during the mentioned study program in business informatics which I really screwed. I even had to repeat the exam. Maybe it was just this frustration concerning the German tax law (probably the most complicated in the world) what subsequently lead me to think about the system and to eventually write my thesis on it.
1. Preliminary remarks
Tax law is a very controversial topic. Many political discussions arose out of it. Often abilities are attributed to the tax law which are said to be corrective and furthering for the economy and cause fairness. Nowadays there are many different taxes and special regulations so that it seems almost crazy to assume that anyone could still direct the economy through taxation or increase fairness. Quite on the opposite: Tax often hinder free and reasonable trading. In earlier days, this fact was more obvious to people. When for example, a tax collector requested the unripe fruits instead of the final harvest he would have not done a good service to his authorities. Today however many value creation processes get nipped in the bud with many tax and bureaucratic obstacles.
Therefore, I advocate for a merely consumption oriented tax system in which all other tax and duties cease to exist. The only remaining tax would be sales tax (VAT). This would have to be adjusted in its amount to compensate for the state revenue lost by the ceased taxes. Since all rational economic processes in a market will finally end up in a demanded product (good or service) a sales tax will be universally effective. Subsidies by the state and all other rather political topics should be consequently shifted to the spending side of the state according to the new concept of taxation. There they should be continually politically discussed. This is a fundamental requirement for the consumption oriented tax system to work smoothly. This is also important to correctly understand the system. But before I move on to the details I first want to clarify and define some terms.
According to the German fiscal code taxes are “payments of money, other than payments made in consideration of the performance of a particular activity, which are collected by a public body for the purpose of raising revenue and imposed by the body on all persons to whom the characteristics on which the law bases liability for payment apply”. Here you see that taxes are not just not payed freely but are obviously theft since one cannot expect anything for it. What makes you liable for payment is ruled by other tax laws in detail. In Germany, the center of one’s life inside the country might already constitute such a liability. Whether and who one has to pay taxes and which amount are ruled by laws. In the here proposed tax system this liability for tax applies now differently.
Burden of taxation
The tax load or tax burden is the amount a person or company liable for tax must pay.
Bearer of the tax
The bearer of the tax is the person which eventually really has to carry the burden of taxation. This person doesn’t need to identical to the person which is liable to pay the burden of taxation. For example, if a company has to pay the tax the company will of course pass on the burden to the customer (by means of higher prices) or to employees (by means of lower salary). Because of this economic fact of tax shifting the bearer of tax is not necessarily identical to the person aimed to be the bearer (the one who the law giver wants to give the burden of taxation).
Tax payer is called the last instance which finally transfers the tax money. For consumption oriented tax like the sales tax, the consumer will therefore be the bearer of taxation. But the only tax payer will be the store owner who has to transfer the received sales tax to the tax authorities.
Tax obligees are those who issue a tax claim to the tax obligor. In the Federal Republic of Germany, the so-called “Finanzämter” are those tax authorities and tax obligees which collect the tax in behalf of the communes, states and the federation. Due to the federalism, the official numbers of taxes as well as the state’s debt might seem better than they actually are. Because additionally to the taxes and debts of the federation there are also those of the states and communes added on top.
Sales tax (VAT)
In Germany, there was once a sales tax (VAT) reform which made an input tax deduction possible. Before that businesses had to pay the sales tax and could not pass it on to their customers. So, in every step of production there was another sales tax added. This entailed that the whole production chain and distribution had to be concentrated in as few companies as possible in order that the price does not get unaffordable for the consumer. This meant that companies had to be allrounders and could not focus on their core competences any longer. So, comparative cost benefits got lost for the consumer. Now after the reform you only pays tax on the value added (VAT = value added tax) in your production step. This was a real relief for the whole economy and made a consumption oriented tax system very reasonable.
Furthermore the sales tax (VAT) is a common tax in Germany. The tax earnings are shared by federation, state and commune. The tax system presented here also requires that the sales tax gets shared since all other taxes cease. Of course, the amounts which every authority gets should be newly politically negotiated and recalculated while establishing the new system. Or we would decide that commune, state and federation may add their own percentage upon the sales tax. So, there could still be competition between communes and states similar to the USA where the states have different sales tax rates. For businesses, the value added sales tax is no burden since it is meant to be passed on to the customer.
Another purpose which overbearing politicians see in the tax law is to control the behavior of consumers. In this discussion, you will often hear of merit goods. Those are goods which are not as much demanded as the state power wishes. One example would be schools influenced by the government. In a free market, those would not be demanded enough to be able to influence the whole population with the government’s doctrine. Therefore, the state must nudge with tax funding and compulsory school attendance. Demerit goods however are for example big cars. The consumption of those is too high for the government’s estimation. That’s why they try to reduce the consumption of big cars with various taxes and CO2 emission penalties. As a liberty loving human being I don’t believe that it is the purpose of the state to bring up their citizens like little children. If certain things are morally wrong then the state should ban them and impose an appropriate penalty for doing or using them. But to motivate people with tax for a certain behavior is either an admission that this thing is obviously not morally wrong or it is insincere since you only want to reduce an immoral thing but not really fight it.
2. Basic thoughts
In politics and society there are many ideas when it comes to the term justice. Socialists proclaim a distributional justice so that everyone has enough (in reality, most often more than enough) for living. And they especially point to the tax laws in relation to their distributional justice and mention that not everyone can afford the same. Libertarians one the other hand refer to justice of merit and stress that work and effort have to pay off. Regardless of where I stand in this debate I want to suggest to every person in accountable status that we might please relocate the battle to the expenses’ site of the state. There you can fight for these things and possible welfare spending or reducing of those while being transparent for everyone. But please do not integrate your idea of justice into the tax laws. It makes the whole thing just more complicated and non-transparent. And also, the intended effect doesn’t occur. Because the most tightly knitted net has the most holes. Therefore, in reality, you will never enforce your idea of justice through the tax system. If you want to reduce the burden of the people then reduce the tax in general but don’t invent uncountable new special rules. And if you want to achieve alleged social justice then distribute your more or less aimed subsidies openly and visible for everyone on the expense site of the state’s budget. But don’t hide them in the tax law. The next government will lever out your actions anyway. And in the covert of the German tax jungle they will be able to do it secretly and all your work would be in vain. On the other hand, just imagine a government would cut the pensions or unemployment insurance. This would immediately attract attention to everyone!
Money and wealth
Money has many functions in an economy. For example, it serves in form of currency as legal tender and can therefore be limitedly used to measure a price of products according to their value. Money has the advantage on barter trade that it constitutes a standardized calculation unit. It generally is counted as store of purchasing power. But considered businesslike modern money has no intrinsic physical value. After the abolishment of the gold standard the value of money is only based on the trust of its users which gets supported by the state’s declaration of its currency as legal tender. It is a legally guaranteed promise to pay – an equivalent for provided services or sold products. If the lawmakers lose their citizens’ or investors’ trust the value of the alleged money is quickly endangered. The current ongoing crisis especially in the Euro zone is sharpening the awareness in a society again of what is the actual being of currencies: A claim that can default like any other. The alleged store of purchasing power suggests its owner wealth but is in the end only a nominal asset. One should not make the mistake to only consider the printed nominal value of money. Since if you haven’t spent this money for consumption it has had no real use for you and your nominal wealth could not be realized so far. Money is not yet consumption and doesn’t absolutely ensure future consumption. Money opens new possibilities of participation in society. More money therefore means more opportunities. But if you don’t realize the opportunities it will generate no use for you. Only in consumption you generate use. This understanding is important to grasp the philosophy behind the presented tax system.
Consumption is the purchase and use of goods and services. Every human being has to consume for surviving while an occupation is at least temporarily not necessary. Consumption is in itself also like a job because without it no economy could work. Some people have more income of money than they can or want spend in consumption. In this case there are several alternatives to consumption:
1. Direct investing
You can invest your money directly instead of using it for consumption. For example, you can invest in company shares or funds. Here the money returns into the economy and will eventually end in consumption anyway.
Instead of consuming you can save your money for example by bringing it to a bank and store it in your account. But actually, the bank is not really storing your money but directly reinvesting it into the economy. As above the money will also eventually end up in consumption.
You can also donate your money to another person or organization instead of buying something for yourself. In this case it is up to the donee to use your money in consumption or lead it into consumption in a different way like investing or bringing it to the bank. To receive an inheritance is somewhat the same as a donation. With death, all material wealth dies as well because you have no chance anymore to consume in the future.
You can also save your money on your own without a bank and without giving it back into the economy. But in this case your money might will continually loose its value due to inflation. A small amount of inflation is even the goal of for example the European Central Bank. Therefore, your potential consumption gets less over time and in the meanwhile the consumption potential increases for those people who have debts in the same currency. So, the debtors consume instead of the savers.
Now it becomes clear that money which is not directly spend in consumption will finally always be spent in consumption. It follows that eventually there will be always consumption. As mentioned above wealth is then defined by the consumption you conduct on your own.
The division of wages in gross and net can lead to the belief of some people that workers and employees would pay taxes. Even though the employer will deduce tax and social security payments from their pay check most people would agree in saying: “We pay tax to the government with our loan.” Here people claim and assume that the worker in his role as tax payer is also the one who bears the burden of the taxation. But this doesn’t have to be the case. We have to critically question it. Actually, the employer is the bearer of tax or better: The customer who pays for the goods and services of your employer is really bearing your tax load. Because on the job market (excluding some special cases of high qualified and rare professionals) there is an increasing oversupply of workers caused by economization, outsourcing and substitution of workers by machines. This results in the fact that private employers are much stronger in wage negotiations than their employees. Let’s assume a scenario that there were no kind of taxes anymore. The forces of the market would have the effect that the gross wages approach the net wages. Because after all the employees were in the scenario with taxes willing to work for the net income. Why should the employer raise the wages now since we switched to the tax-free scenario? Okay, maybe a little bit since the employee know that also the employer has less costs now. Therefore, it is in the most cases and especially in the cases of low-wage workers a wrong assumption that the employee really pays taxes with his gross income or at least that he bears them economically. By displaying the gross wages in the job contract it generates unnecessary discontent. In fact, the employer bears the tax load and would if he thinks economically rationally only pay his workers only the net wages as explained even if there were no taxes. The deception now becomes clear that there aren’t any shares of taxation. The strong and rational business owner already subtracted those supposed shares from his employee’s wage mentioned in the working contract. And in the end the businessman will always pass on any costs (and therefore any taxes) to the customers. Some people argue that employees sometimes get back money after filing their annual tax declarations. This is meant to prove that employees really pay taxes. But in fact, those tax returns are like subsidies the state provides for his people. It doesn’t say anything meaningful about the real tax burden of the employees. Those subsidies could even exist in the new tax system. But they would have to be considered as expenses and not (paid back) income of the state.
Sure, every employee is also a consumer since every employee is also a human being. And humans have to consume at least for survival. And even if not every worker might be also a customer of his company in a simplified and macroeconomic perspective it makes no difference if the employee himself or someone else is the consumer of his own products. Therefore, the employee is ultimately indeed bearing the tax load through the prices of the products he consumes. But the new tax policy promoted here will provide more transparency and economical-logical justice.
Basic thoughts of a consumption-oriented tax system
To serve someone voluntarily is an honorable deed. It is preferable for society if more of this happens because it increases the wealth of society. It is more blessed to give than to receive. But one who always only consumes without producing is reducing wealth. So, it will be good for a society to motivate its members to produce prosperity. In any case a punishment for producing wealth should be avoided. Because this will demotivate and hinder innovation.
But exactly this is happening in Germany when productive work is obviously punished by direct taxes and other duties. It would be better to tax eating up the wealth. And since we have seen above that the earning of money has no value in itself but has only value realized in consumption we should therefore only tax consumption. In the end, the tax load is always carried by the consumer as already explained above. Why don’t we then communicate this fact transparently and openly so that the incentives are set correctly? The society has to thank everybody who only has produced goods and services. Because he has given labor power as a benefit to the society without having received a real service in return (consumption). Whoever consumes takes wealth from society especially when he pays with foreign money (social security benefit). If we need taxes at all then we should start here. Because what is my advantage when I earn 10,000 Euros per month? I can’t eat that money. Until I eventually turn it into use in consumption I am not really better off than someone who receives 400 Euros of social security benefits. Until consumption happens I rather have to live with the possibility that my credit of wealth will decay because of inflation, direct theft or my own death.
A consumption oriented tax law will fairly deal with it according to circumstances and starts at that point when the tax obligee generates actual use for himself: in consumption.
The true fruits of harvest will be taxed
In earlier times, a part of your harvest would have been given away as tax to the authorities. Today’s income tax is not a correct modern translation of that type of taxation. Because my income is not my harvest. My money will only become the fruits of my work in consumption. According to this, a consumption-oriented tax system would finally tax the harvest again and not the seeds without waiting for the harvest becoming plentiful or even existing.
Less bureaucracy and more transparency
Through simplification and unbundling of the tax law there will be less planning and administration costs in the private and for the government. All parties will therefore save resources which can be used more efficiently elsewhere. On a macroeconomic level it will help to grow the economy and to create new jobs. Of course, many jobs will be cancelled which have no economic benefits (measured by actual increasing of wealth of a society) and bad effects of bureaucracy will be reduced as well. This includes the non-transparency of administrative procedures, the slackness of many business processes, the inflexibility of decision makers as well as initiative and innovation blocking factors which are created by administrative regulations.
At the site of the government less money has to be invested in fighting tax fraud since government has only to focus on one tax. Also, the sales taxes are quicker and easier to collect than many other taxes.
Companies and private households have an absolute transparency of taxation and therefore a better assurance about their tax expenses. Taxes are only paid while shopping and in a known rate. Tax declaration is not necessary any longer. Tax loopholes are not existing anymore because of the simplicity of the system.
For the people, the new tax system would make it much more transparent how and to which extent the state is taxing the individual. Political actions are easier to review and to anticipate. The citizen will become more responsible and doesn’t need an education in law anymore to understand connections in politics and the tax system.
Although the new tax system will reduce bureaucracy it will keep the positive attributes of bureaucracy. Through the simplicity of the tax system attributes like effectivity, neutrality and security which are the goal of bureaucracy will be ensured by the process of taxation.
Also, the acceptance of a at least transparent tax system should be higher than a non-transparent and probably corrupt tax system. Therefore, one would also expect the willingness for paying taxes to rise which would bring more income for the state or would reduce the amount of taxes needed to be collected.
With the new tax system, the value creation process is saved from tax intrusions. This is economically rational because a too early taxation distorts the formation of prices and disrupts the accumulation of capital which is important for many economic actions. The state would not request the unripe fruits instead of the final harvest with this new tax system. It is not rational to tax companies only because of envy or other reasons because it only taxes their contribution to society. With the new system, we prevent the fact that businessmen do not need to manage their capital according to tax considerations but only according to economic necessities. Therefore, a further optimization of resource allocation will be achieved and the entrepreneurial creativity and initiative will be channeled beneficially.
As described above, there are merit goods defined by the state like for example public schools. Some people might consider is as a downside of the introduced tax system that now people can enjoy public schools even though they only pay a few taxes or none. But here people forget that now even tax payers who don’t have any kids have to finance this good of public schools. Besides we could introduce school fees. Then only the consumers of this good would pay tax. The German compulsory school attendance would be enough reason in our example to enforce people to consume. Proponents of social justice could politically advocate for school coupons paid by the state on its expenses’ side. But you don’t need to make the tax system more complicated for that purpose.
But in fact, the proposed tax system brings another big benefit. It forces politicians to be more honest. Schooling fees would expose the lie of free education once and for all. Because now the tax payer is financing the alleged free education.
For our Socialist friends there are benefits, too
Because the new tax system has only sales tax as an universal tax which is directly linked to the consumption politics gets more opportunities to react agile and unerringly to the economic developments. So, the consumption can be directly stimulated by tax reductions similar to the interest rate lowering of central banks without having to think of various side effects as you would have to with different kind of taxes. For example, you will avoid the long-lasting political discussion about which taxes should be lowered for the best total economic effect. So, even the economic experimental games and the crashing of whole economies will be much more comfortable and efficient ;-)
4. Problems and results
Tax exemption for profit from interest
In the light of my thoughts about money and true wealth it becomes clear that a taxation of capital yields isn’t necessary anymore. Because when I want to realize my profit from investments in consumption then I pay sales tax.
Cessation of business taxation
Companies are paying some business taxes but are factually not bearing the tax burden. Because taxes are not neutral expenditure but normal costs like the acquiring means of production. Those will be added to the product prices. And as already indicated taxes are not reducing the profits but only the pricing pressure of competitors does (except of course of the competitor has a tax or subsidy advantage). The many political discussions about loan and tax fairness were in vain according to the laws of an optimal and free market since they don’t result in fundamental changes in the tax law. A company only “pays” taxes in the case that they cannot sell their products with a profitable price (and this one again reduced by the contribution margin for the tax). In this case the company really bears the tax load. But this is the worst case to tax a company. Because sales problems are a symptom of a company’s crisis if they cannot be corrected by other business areas. In this situation, the tax load can be the factor which leads a business into bankruptcy. This is neither good for the economy nor fair because taxes are hindering the growth of all companies under the current system. But only troubled companies and especially small and often new founded businesses (and therefore often the most innovative ones) which have no or only an insignificant profit are destroyed by those taxes. The current tax system doesn’t differentiate always between distributable profit and profit which has to be directly reinvested into the business. The differentiation might be hindered by the fact that distributable and reinvested profits are not exactly defined and are choices made by the business managers. For the value added tax with pre-tax deduction this problem doesn’t exist. Either the company can sell its products and gets the aimed price which already includes the sales tax as contribution margin paid by the customer or it gets the tax refunded because of the pre-tax deduction by the tax agency. The company will profit from its profit independently of the amount. And distributable profit will only be taxed when it gets eventually realized in consumption.
With the new tax system big companies wouldn’t get any advantage over small and midsize businesses. Because they cannot anymore buy expensive consultant which teach them tax saving tricks and they cannot minimize their tax through smart business structures and locational advantage. Especially start-ups and innovative midsize businesses can and must stand out as very profitable due to efficiency and smart ideas to attract investors. Because unlike major corporations they don’t have a high liquidity. Especially those companies should be supported to build up own capital instead of artificially reducing their profitability by taxation. With the new tax concept businesses don’t need to invest their resources into displaying their economic situation as very negatively in front of the tax agencies which could also scare potential investors away.
Cessation of the death tax
While the death tax is economically devastating for companies (many family businesses are heavily burdened by new liabilities caused by the death tax during a generation change) it is also problematic in the private life as described above. Because a monetary legacy (as with the other examples) is useless in the first moment until it will eventually be used in consumption. But then we have the sales tax. For the legacy of other assets, it has to be noticed that it was already fully taxed when they were purchased (at least if the new tax system was already implemented). Double taxation is unjustified.
Cessation of social security duties
The state should decide whether it wants to enforce insurances for all people according to the principle of solidarity which are over-priced and financed by economically weak people or if it wants to be liberty friendly. If the state decides for the principle of solidarity then there is no reason to not pay the social security expenses directly from all the tax earnings. This would at least be honest, transparent and really solidary.
Cessation of many other taxes
With the new tax system, many other taxes will cease to exist. Some of them are justified with their governance function. One example is the dog tax. Having dogs will not be taxed in the new system. Therefore, the whole community has to pay for the damage (like some certain pollutions) created by dogs. But here we should follow this rule as well: Either the society decides that they don’t want to pay for dogs and their results and outright prohibits owning dogs or it enforces the owners of dogs to pay for their dog’s created damage. The owner of the dog can self-reliantly correct the collateral damage which was created through is possessions. A compulsory charge should only be decreed according to a state of law principle when someone neglect his responsibility – for example with a penalty fine but not with a preventive tax. Because we should have presumed innocence. But one could reply that we don’t have a controlling institution and that it would be too expensive to create one in many cases. We would need to hire so many controlling forces that a tax would be cheaper. Because we have the principle “nullo actore nullus iudex” (without an accuser no judge). If a government or an affected private person is not able to be that accuser then one cannot generally accuse all dog owners. Everybody should be responsible for his own possessions. And like for all other things the laws of the market will help. If dogs and their legacies should one day really become a plague then the penalty fees or the willingness of the people to be controllers will increase.
Cessation of basic tax-free allowance
The basic tax-free allowance for income tax will cease with the new tax system. But this allowance can be paid out instead on the expenses’ side of the state. This can be done in form of an amount of money paid out to all working people. Here, many people see a chance of establishing a citizen’s income or an unconditional basic income. But this is not a real translation of the basic tax-free allowance into the new system because you would only get this allowance if you would work in the first place. You could not pay with that for an unconditional basic income above the level of already established social security.
While rent is in the current tax system of Germany not taxable with sales tax they will with the new tax system. But this will only result in small or none changes of price since landlords have already always factored in their pre-tax for investments since they don’t get them back from the tax agencies. But we have to consider that a rapid change to the new tax system would disregard already paid investments of the landlords.
Disadvantages for some enterprises
Since companies have to pay their pre-tax on their own before they get their money back from the tax agencies liquidity problems can be a result of the new tax system. This will be especially evident in companies where the ratio of human work in comparison with other means of production is relatively low. But one has to recognize that it will be only a temporal problem since the companies will save a lot of tax money and therefore will see an increase of liquidity. If companies have enough time to adjust to the new system they can prepare themselves for it quite well. Also, a slowly and gradual change can help.
A slump of consumption
One point of critique of any raise of the sales tax and which will also be mentioned for the new tax system is that the consumption will be decreasing under the new tax load or even slump and with it the whole economy in the worst case – especially in times of crisis. In accordance with the proposed taxation concept we would have to reply that the overall tax load will not increase like it would during normal raises of sales tax but that all other taxes which are already included in the consumer price will be replaced through the only left sales tax. Gross prices will stay the same while net prices will fall. The taxes contained in a product will only be finally transparently displayed for the customer which might result in discontent for a short first time. But since the gross end price will not change there is no change in consumer behavior to be expected in the long run. On the opposite, we might even expect that the product prices will shrink or the quality increase since the companies will save a lot of resources in administration work in the new tax system which they can allocate for other tasks. Therefore, products which used to be not profitable can now be finally introduced into the marketplace which results in more diversity of products.
Results for international trade
According to the arguments made we can infer that the expenditure for the German social security system as well as income and enterprise taxes as well as all other taxes are included in the net prices of German products. If we would switch to a sales tax based system then all tax and duties would really only be contained in the gross price. Since there are no sales tax for exported products in Germany those German products will become very cheap. Also, the investment hindering factor of payroll taxes will cease to exist in Germany. Germany would become a so-called tax haven for companies which would bring jobs (back) to Germany and would end tax caused outsourcing.
In order that foreign products with a lower or even no sales tax don’t have a tax caused advantage over domestic products an import sales tax will be charged. But this would only be executable for non-EU countries. For the EU, we have to consider the following: If we would introduce the proposed tax system in Germany it had to be also introduced in all other EU countries which would require all tax and trade laws to be rewritten. If the EU would introduce the home state regulation EU countries could just be treated as non-EU countries which would make everything easier. But the EU doesn’t need to be an obstacle to introduce the consumption oriented tax system.
But let’s forget the EU for a moment. Because German products become cheaper with same or even higher quality (because the saved money in tax and their administration can be invested in product design) demand from foreign countries will rise. This will also create and save jobs in Germany. The German social security costs and big parts of the taxes will not be exported inside the high product prices anymore. Other nations have anyway no interest in financing the German social system or are not willing under given pricing conditions. This has resulted in lower demands for German products as would be necessary if it wasn’t for the high German prices.
If Germany could now sell their industry goods cheaper to poorer countries it could even be counted as a form of development aid. On the other hand, foreign dealers which are interested to sell their products in Germany would now have to pay for the German social security system since they are included in the import sales tax.
This advantage caused by the tax law would motivate other countries to introduce such a tax system as well. Germany would benefit from pioneer profits if it would switch to the consumption-oriented tax law soon. But it is possible that the new system would spread virally since it brings the named advantages. This tax system is an instrument of protectionism since it stimulates the exports on behalf of the imports. But other tax systems also include protectionist actions. No tax and no protectionism would of course be the better alternative. Generally, I am for free trade. But if this isn’t the goal of politics then the mentioned type of protectionism is still the best and most transparent. Because one must emphasize that sales tax is the optimal tax for a (global) specialized and process-oriented economy since it only taxes the final products and doesn’t disturbingly intervene into the market and value chain.
Results for politics
It is the job of national state politics to finance government tasks with a certain amount of tax income. If the costs for the government are higher than the tax income then politics can reduce the costs and therefore the services of the state or they can increase the income by raising the tax load of every citizen. If the tax system is no based exclusively on sales tax then politics can only act as long as they find taxable companies and taxable workers’ income. This can result in a decoupling of national income and national wellbeing. Because politics would then have only the goal to workers earn a lot and companies make high profits so that the state can collect much tax. But if companies make an increasing profit from exporting products and if workers cannot consume domestic products because of high taxes even though they earn much money and maybe even buy foreign products then this is no conflict of goals. Because politics is only interested in high tax income. But on the long run this type of politic behavior would destroy the domestic market and damages the domestic economy. Jobs would be lost and the national wellbeing, too.
But if tax income would be linked to consumption like in the proposed tax system then politics must support domestic consumption. The support of the domestic market would therefore always be a political goal. The domestic economy would have a lasting support and the national wellbeing would be secured. Therefore, a consumption-oriented tax system wouldn’t be only a paradigm shift in tax law but also in everyday politics. In my opinion, it would be better to live in a liberal economy with worldwide free trade and free movement of people. But as long as we have different national states and their politics is serving only national interests the proposed tax system is the best choice.
Increase of black market and sales tax fraud
Because of the non-existence of income taxes black labor is logically impossible since there is no tax to avoid. But due to the increase of the sales tax an increase of black markets for sales products can be expected because it becomes more profitable.
There are only a few first producers who are not dependent on external means of production. A farmer needs for example various machines and seeds which he has to purchase with sales tax. If he wants to get this pre-tax refunded then he has to enter value added tax into his books. So, such a first producer is highly interested in not committing tax fraud. In some cases, like a restaurant the owner can declare less sold units than he actually did sell and therefore gets unlawfully pre-tax refunded. But because the tax agency has now less controls to do for other types of frauds now they can focus on these kinds of frauds. Anyway, it is easier to control for sales tax fraud than other types of tax if the fraud is frequently or at a big scale. Because no economically rational store owner would buy more units than he can sell for a long period of time.
But there are some service providers like IT-services which need not many means of production except technical skills. This results in a higher profit margin for fraudsters than in the current system. This can only be prevented by more controls. But as said before, tax agencies have more free capacities for this purpose in the new system and can specialize on sales tax fraud.
Another possibility for fraud is a conspiracy of a whole vertical chain of production against the tax agencies. But this is highly unlikely since all conspirators have to trust each other very much. Furthermore, there are very rarely real and clearly defined vertical chains of production. A state’s evidence provision might also help especially if the chief witness doesn’t get punished but even rewarded.
Since the new tax system is very simple there are also not many ways to bypass it. Tax evasion is only possible by leaving the country. But whoever wants to benefit from the German state or wants to live in Germany would have to pay taxes every time he goes shopping. The same would be true for imported goods or products bought during vacation abroad that exceed the exemption limit.
An implementation of the tax system would improve many things. But that this would remain in the future as well and doesn’t get reversed or compromised with 1000 special rules by the next government again the new principle behind that new system of taxation has to be written into the constitution of the country. The tax law should in the best case (as officially done with the European Central Bank) be separated from politics. All political acts should be done on the expenses’ site of the state. And of course, bi- and multilateral tax policies would have to be rewritten as well. Generally, this new tax system can be implemented in a libertarian minimal state as well as in an authoritarian socialistic state.
Implementation according to the big-bang-method
The big-bang-method is an abrupt change to the new system with a sufficient lead time before. Here certain temporal fluctuation of consumption can occur. But those consist of buying decision which are either earlier or later than they were originally planned. Also, a fluctuation of liquidity of some companies might be a result of this change. One may doubt if all subjects of our economy can adjust sufficiently to this change even with enough lead time. Erroneous adjusting may lead to critical problems.
Implementation according to a successive method
With a successive method (a slowly and gradually implementation) it is most easy and comfortable to adjust for all parties. If unexpected problems occur one can still modify the process while implementing the system. Consumption won’t have such strong fluctuations like with a big-bang-method which itself results in less extra problems for the companies and the ability to do the implementation during an economic crisis. A successive implementation can last months or even years. With this method sales tax get raised gradually while all other taxes are reduced in the same ratio until those reach zero percent. It is difficult to predict how much the sales tax would increase. But with a successive implementation the system would approach the optimal tax rate step by step. But one would expect that the final sales tax rate would equal the public spending ratio. Because if the government’s activities in the economy is for example 50% of the economy size of a country then 50% of the economy size have to be paid to finance the government. If we have a public spending ratio of 50% we would also need a tax rate of 50%.
One more benefit of the successive method is that it is more realistic. Human err and there are many wrong information circulating in this world. But if we have a slow and gradual implementation we can fix occurring problems.
From my minarchistic-libertarian perspective I surely reject the most tax, tolls, protectionism and many other things mention in this article. However, a consumption oriented tax law is to be preferred against all other system. I hoped I could make my point here. So, my described tax model is comparable to the FairTax model in the USA which also had famous libertarian proponents like for example Ron Paul.
What do you think? Did I think too narrowly here? Do you know other objections which I didn’t deal with? Or do you also prefer such a tax system? Please leave your comment below!