“One percent more inflation is about ten billion euros in additional tax revenue,” said ex-Health Minister Jens Spahn (CDU) the day before yesterday on Markus Lanz’s talk show on ZDF. The finance minister is making the biggest surplus this year. But is that true?
“In the initial phase of inflation, the state has significantly higher income,” said Jens Spahn on Wednesday at Markus Lanz on ZDF. His simple calculation: one percent more inflation would correspond to around ten billion euros in additional tax revenue. After all, the duties paid from VAT rose by exactly the same percentage and this in turn accounts for the largest part of tax revenue. His demand from this: The additional income should be used specifically for the purchase of natural gas by the state and targeted relief. However, the statements of the former health minister are problematic because they are only partially correct.
Germany had total tax revenues of 833 billion euros in 2021. This includes all federal, state and local tax revenues. Even if Spahn did not explicitly say so, it can be assumed that his calculation is based on the fact that one percent more inflation means that tax revenue will also increase by one percent. One percent more inflation would then mean 8.3 billion euros in additional revenue. With “about ten billion euros” the CDU politician would not be so far away.
no It is very simple, because hardly any type of tax depends on the inflation rate. Spahn’s first mistake is that VAT accounts for the majority of German tax revenue. The state took in around 187.6 billion euros in 2021 through sales tax, as value added tax is really called. That is 22.5 percent of tax revenue and only the second largest revenue item.
The largest tax revenue comes from wage and income tax. Their share last year was 290.7 billion euros or 34.9 percent of all tax revenue. Follow in the other places
The problem: All of this tax revenue does not increase in proportion to inflation, because revenue is affected by more than just price increases.
Example wage and income taxes: They are calculated based on the wages paid. But inflation doesn’t change them. After all, one percent more inflation doesn’t mean that you will also get one percent more wages – as nice as that idea would be. In fact, in 2022 wages will rise at a much slower rate than inflation. While the latter currently averages 7.3 percent for the year, wages only rose by an average of 3.5 percent in the first half of the year.
But even that says little about the expected tax revenue. In the period from January to August they have grown by 9.7 percent compared to the previous year, i.e. even well above the inflation rate. But that will not remain the case until the end of the year. In September, for example, the energy allowances for employees will be distributed, which are financed by a federal tax waiver. Overall, the Federal Ministry of Finance even expects wage tax receipts to fall over the last four months. But it doesn’t matter how high the income tax revenue is at the end of the year: it has nothing to do with the inflation rate.
Revenue from sales tax is bubbling up. The state had already received 188 billion euros from this by the end of August, more than in the entire previous year. And here Spahn is right that the income actually correlates with the inflation rate, because if the price of a product increases by one percent, one percent more sales tax is due.
But: This only applies if the goods are still bought at the higher price. In addition to the inflation rate, the total sales tax revenue also depends on how much German citizens consume.
That’s been a lot so far. Retail sales rose 6.4 percent from January to July, while hospitality rose 46 percent. However, this is not likely to remain the case until the end of the year. The GfK consumer climate index, which asks consumers about their purchase plans in the coming months, fell to a record low of minus 42.5 points in October. Never before has there been such a sharp drop in consumption in Germany as it has been to date.
By the end of the year, this will also have an impact on revenue from sales tax. In August, these fell by 5.4 percent compared to the same month last year. If this were to remain the case until New Year’s Eve, the 14.6 percent increase in income would still be twice as high as the inflation rate.
The income from the trade tax is at best indirectly influenced by the inflation rate. It is collected by municipalities and is linked to the earning power of a company, which in turn is determined from the estimated future business situation.
The income from this has already reached a record value of 61.1 billion euros in 2021, which is likely to be pulverized again this year. In the first quarter, revenue increased by 26 percent compared to the same period last year. Even if the business situation has meanwhile deteriorated for many companies, the total revenue in 2022 should be significantly higher than in the previous year. The indicator for this is the participation that the federal government receives in trade tax. It even rose by 35 percent by the end of August.
This shows that German companies are doing well for the most part. And it shows that trade tax revenue has no connection with the inflation rate.
He’ll probably be right about that, yes. The Tax Estimation Working Group, which estimates the tax revenue for the federal government, assumed EUR 889 billion this year in its last report in May. That would be an increase of 6.7 percent and would actually be in the range of the inflation rate – even if that is coincidental and has no causality. However, the estimate comes from a time before the third relief package, before the fuel discount and 9-euro ticket. The working group stated that these measures could reduce revenue by up to 22 billion euros. Then the increase would only be 4.1 percent.
But here, too, there is a but: not only are government revenues increasing, but so are its expenditures. After all, the state also has to pay for electricity, natural gas, oil, petrol and similar products for its authorities and employees. On the expenditure side, however, the interest rate hikes by the ECB weigh heavier because they also increase the interest payments in the federal budget significantly.
From 2020 to 2021, the federal government’s annual interest burden has already risen from 10.5 to 21.8 billion euros. In 2022 it should probably be 16.2 billion euros, in 2023 even 29.5 billion euros. In addition, the relief packages already planned are eating up a lot of money.
The bottom line is that nothing remains of the additional tax revenue. On the contrary: the federal government alone expects 140 billion euros in new debt this year. In the overall budget, i.e. including the federal states, municipalities and social security funds, debt rose by 113.4 billion euros in the first quarter of 2022 compared to the previous year.
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