Schwidetzky: Musings on a German Tax Conference

Walter D. Schwidetzky shares his interesting "Musings on a German Tax Conference" on http://taxprof.typepad.com/:

"I have recently returned from a German tax conference on the value added tax (19% in Germany). Some musings:

A big issue for the value added tax in Europe is people gaming the system. As there is not a uniform value added tax in Europe, people will often buy a product in a country with a lower value added tax and then bring it into the country where they live. With higher end items like cars, this has mostly been stopped, but for other items it is a common problem, especially for people living near borders.
German maximum income tax rates are high by US standards, in the low 40%’s for income above around 60,000 Euros (around $81,000 depending on exchange rates). Germans may, however, effectively deduct payments for medical insurance and mandatory pension contributions. As a consequence, the net effective rate of income tax in the US and Germany, especially for middle class families, may not be that different once medical insurance and pension contributions are taken into account. Most Germans do not think their tax rates are too high, at least judging by the comments of people at the conference (who are mostly high earners). However, Germany significantly lowered its income tax rates in 2000, and its economy has done significantly better since then, providing some possible evidence of a move from the right side of the Laffer curve to more in the middle. While Germany’s unemployment rate has come down as a result of the recent boom in exports, it remains stubbornly high, around 8%, 15% in the former East Germany. At the same time, Germany has a shortage of skilled workers. I have been told that most of Germany’s unemployed have few skills and often a limited capacity to develop them. I should add that many Germans feel that the reunification has created many of Germany’s economic problems, which have been tough to solve. The unemployment rate in the former West Germany is comparable to that of the U.S.

Most Americans have a somewhat romanticized view of universal health care. While few Germans would support moving away from universal health care, most would agree that their system is badly in need of repair. There is a bewildering array of some 300 health insurance companies, mostly private, though some at least have a state association. A minimum amount of health insurance is required. Most who can afford it buy upgraded private insurance to get better care and better service. If you have the standard insurance, and you want to see a doctor, you don’t make an appointment; you just show up and wait until the doctor sees you. Might be an hour, might be half of a day. An American friend of mine gave birth to her third child in Germany. Initially she was put in a room with 7 other women, which freaked her out as she was used to US standards. She and her husband paid extra for a semi-private room. (A digression: When she and her husband asked for a circumcision, the doctor responded: ”Half or whole?” Not a question they wanted to answer incorrectly…). Many young German hospital doctors by the hour make the same as the janitorial staff. As a consequence, large numbers of young doctors are leaving Germany for better paying jobs in the US, Switzerland, and England. I would rather be sick with good insurance in the US than in Germany, but if I was poor, I would rather be sick in Germany where at least I would get treatment.

Most Germans probably also have a greater sense of social obligation to those less fortunate than most Americans. Most Germans trust their government more than most Americans trust theirs. Governmental paternalism is much more accepted in Germany than the US. The reach of this would surprise many Americans, however. For example, free speech is not allowed nearly to the same extent in Germany as it is in the US. Also, Moslem women who want to teach school are not allowed to wear head scarves (which has the effect of preventing many from entering the teaching profession). Germans commonly feel that the scarf subjugates women and also feel that teachers’ religious views should not be obvious to students. These considerations trump religious freedom issues. The Church of Scientology is at risk of being outlawed in Germany, something that could not happen in the US. (I might add that there is some hypocrisy here. In Bavaria it is common to see crosses on the walls in courts and schools.) Last I checked, if you change abodes in Germany, you are required to register with the police. Name changes are generally not allowed.

Many of my liberal colleagues probably would prefer the German system to the US system. Having lived in Germany and experienced German paternalism first hand, I am more hesitant, but I don’t doubt the US and Germany could learn from each other. As Prof. Ted Seto pointed out in a recent posting on TaxProf, the US needs to pay more attention to how other countries do things. There is plenty we could learn."