SFB 303 Discussion Paper No. A - 229
Author: Bös, Dieter
Title: Tax Reform in Germany
Abstract: There is not much of a theoretical basis for the German income tax reform. The discussion of both theory
and practice concentrated on the redistributive effects of the new rate structure. The influence of the income tax
on the labor-leisure choice and on investments of small and medium-sized firms has been mentioned by theorists
and by practitioners, but has not been elaborated. The accentuation of the distributive consequences of the rate
structure could have been expected. Most German economists like neither Mirrlees-type models of income
taxation nor applied literature on tax-related labor-leisure decisions of the NBER-type. The German handbook of
public economics (Handbuch der Finanzwissenschaft; 3rd edition, 4 volumes 1977-1983) contains no special
papers on either optimum taxation or on the labor-leisure choice resulting from income taxation; the allocational
theory of income taxation is replaced by a special taxonomy of tax functions ("Steuertariflehre"). This is a sort of
descriptive way of informing legislators about the distinctions between marginal and average tax rates, between
liability elasticity and residual income elasticity, between various measures of progressivity, and between
various types of income tax functions which a legislator can choose in practice. No US or UK book on public
economics has a counterpart to such a taxonomy. In the following sections it will often become clear in which
way the concentration on "Steuertariflehre" can be held responsible for the arguments of German policy makers
and scientists. Since approximately 80 percent of the gross revenue losses from the tax reform result from the
86/88/90 reduction of the income tax rates, it is appropriate to concentrate this discussion on the new rate
structure, which will be done in Section 2. I shall argue that the reform of the rate structure can only be
understood on the basis of the German accentuation of the taxonomy of tax functions and the absence of a
sophisticated treatment of tax-related labor-leisure distortions. Section 3 will be devoted to the distributional
consequences of the tax reform, including tax reliefs for families. Section 4 deals with a political tax cycle,
closing of loopholes, and the macroeconomic consequences of the tax reform. A short conclusion follows.
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Creation-Date: 1989
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