On the Proposal of the Economic Experts: Majority of Economists Favor Higher “Wealth Tax Rate” and Reduction of Bracket Creep
The energy crisis resulting from the Russian war of aggression and the associated price increases are putting a strain on the German economy and population. Although the German government’s relief packages can cushion the impact of the crisis, they are at the same time exacerbating the strain on public budgets in the wake of the Covid-19 pandemic. In its annual report of November 9, 2022, the German Council of Economic Experts therefore proposed a temporary increase in the top tax rate, the introduction of an energy solidarity surcharge for top earners, and a postponement of the reduction of bracket creep. The 41st ifo and FAZ Economists Panel is dedicated to the Council of Experts’ tax policy proposals. The survey, in which 153 economics professors participated, was in the field from November 16 to November 23, 2022.
The experts state that counter-financing the relief in the form of a temporary increase in the top tax rate and the introduction of an energy solidarity surcharge for top earners will limit the fiscal stimulus and thus the inflationary effect of the relief. In addition, the relief packages are not well targeted in that they also benefit higher earners. The income tax increase is intended to neutralize this. The Council of Economic Experts also assumes that a time limit would keep negative growth effects manageable. Moreover, given how broad-based and thus cost-intensive the relief is and since higher-income households will also benefit, they call for the reduction of bracket creep to be postponed.
Economists Prefer Reduction of Public Spending
In view of the increased burden on public budgets as a result of the Covid-19 pandemic and Russia’s war of aggression, 52 percent of economists favor a reduction in public spending. In contrast, 43 percent of the participants are in favor of tax increases. At 37 percent, a similarly high level of support is found for suspending the debt brake. Only 6 percent are in favor of setting up further extra budgets; 9 percent are in favor of continuing the current policy; 16 percent of the participants support “other” measures to ease the burden on public budgets, such as reallocations within the budget or the systematic expansion of energy supply to overcome the crisis. Multiple responses were possible.
Temporary Increase in Top Tax Rate Divides Economists
The Council of Economic Experts’ proposal to temporarily increase the top tax rate divides economists into two roughly equal groups: 52 percent reject the proposal; 46 percent support it. Only 2 percent are undecided. In 2022, the top tax rate applies to annual taxable incomes of around EUR 59,000 and above, and currently stands at 42 percent. In its annual report, the German Council of Economic Experts does not specify what it means by the term "top tax rate. The Federal Ministry of Finance (BMF) uses the term for the tax rate of 42% on annual taxable income above about 59,000 euros (BMF, 2022). In this respect, it can be assumed that the Council of Economic Experts also refers to this definition. Advocates of an increase argue that this would ease the burden on the national budget. In addition, there would be a redistribution, which is particularly necessary because top earners are not only less affected by the crisis, but have also benefited from the relief measures. Some participants are in favor of a permanently higher top tax rate, while others emphasize the temporary nature of the increase. Critics of the increase point to the already high tax burden, the early onset of the top tax rate, and the growth-inhibiting effect of tax increases in general. A large number of economists fear that the temporary tax increase would become permanent.
Temporary Increase in Top Tax Rate Is Linked to Fair Burden Sharing in the Crisis
Of those economists who support a temporary tax increase for top earners, 94 percent say that this would improve the fairness of burden sharing in the crisis, 64 percent see it as a way to help balance the national budget, and 47 percent believe that it would improve the targeting of energy subsidies. In contrast, only one-quarter of those economists who reject a temporary tax increase for top earners believe that it would improve the fairness of burden sharing and help with budget consolidation. Only 13 percent of the participants in this group state that tax increases would improve the targeting of energy subsidies. Of those in favor of temporary tax increases, 11 percent expect them to reduce inflation. Of the critics, only 6 percent share this view. Meanwhile, 13 percent of those who oppose a temporary tax increase for top earners are concerned that it will worsen the recession. Of those in favor, only 2 percent fear this.
Economists Call for a Higher Income Threshold for the Top Tax Rate
A full 92 percent of economists are in favor of raising the income threshold higher than around EUR 59,000, which is the level above which the top tax rate of 42 percent is payable in 2022. With the Inflation Adjustment Act passed by the German Bundestag, the threshold is to be raised to around EUR 63,000 in 2023 and to around EUR 67,000 in 2024. At 75 percent, the majority of economists still consider these thresholds to be too low. For 31 percent of the participants, the top tax rate should start at an annual taxable income between EUR 70,000 and EUR 80,000; 28 percent favor a threshold between €90,000 and €100,000. Thresholds above EUR 100,000 are called for by 11 percent of participants.
Majority of Economists Reject Energy Soli for Top Earners
At 40 percent, support for an energy solidarity surcharge for top earners is slightly lower than support for a temporary increase in the top tax rate; 56 percent of participants oppose such a surtax. The lines of argument are similar to the temporary increase in the top tax rate. On the side of the supporters, reference is made comparatively often to the demand that broader shoulders should bear a greater burden in a crisis. Critics point to the solidarity surcharge for the reconstruction of eastern Germany, which was continued for decades and today represents a non-transparent additional tax for top earners.
Majority in Favor of Increasing the “Rich Tax Rate”
Above an annual taxable income of around EUR 278,000, the so-called “wealth tax rate” of 45 percent applies above the top tax rate. While a majority of economists reject a temporary increase in the top tax rate, 56 percent support raising the wealth tax rate; 39 percent even support a permanent increase, 32 percent support maintaining the wealth tax rate at its current level, while 12 percent support abolishing it entirely. One-quarter of the participants would like to raise the wealth tax rate temporarily or permanently by more than 3 percentage points.
Large Majority Favors Inflation Adjustment Act and Rejects Postponement
At 76 percent, a large majority of economists support the Inflation Adjustment Act passed by the German Bundestag, which compensates for the effects of bracket creep along the income tax scale and thus cushions the additional burden on citizens as a result of high inflation. Only 12 percent of the participants oppose the law, while 12 percent are unsure. Proponents emphasize that the state should not profit from inflation through higher tax revenues while the real tax burden increases for citizens. While some of the participants consider the compensation to be fundamentally overdue, others emphasize that the relief for low and medium incomes should be offset by higher taxes for top earners. Critics of the Inflation Compensation Act point to the government’s current high financing needs. The Council of Economic Experts’ proposal to temporarily postpone the Inflation Adjustment Act is rejected by 57 percent of economists. They fear that a temporary postponement could turn into a permanent one. Only 24 percent support the proposal and justify it, among other things, with an exceptional situation in which public finances have priority. Around 19 percent are unsure.
Two-Thirds of Economists Support Tariff on Wheels
A full 67 percent of the participants are in favor automatically adjusting the income tax rate to reflect inflation. They justify this by arguing that the tax system should be geared to real incomes, that this would eliminate hidden tax increases, and that this would prevent the government from becoming an inflation winner. In addition, this would remove the recurring discussion about bracket creep from the political agenda and allow the focus to be placed on other tax policy issues. Meanwhile, 26 percent are against such a regulation. They argue, for example, that the risk of inflation would be underestimated without bracket creep, that measuring inflation is problematic, and that parliament should retain decision-making authority.
Die Soziale Marktwirtschaft aus Bevölkerungsperspektive III/III: Beeinflussen Informationen über die Soziale Marktwirtschaft die Zustimmung der Bevölkerung zur Wirtschaftsordnung?
ifo Institut, München, 2023
ifo Schnelldienst, 2023, 76, Nr. 1, 49-53
