BBC News reported today about an idea circulating in Germany about higher taxes for the rich.  There is talk of a 5% “wealth tax”, which in theory would mean the most wealthy German residents helping to stabilise the economy.

I don’t believe it would work, and it is probably the wrong way to go about solving the economic problems here.

Why it would not work

It is very difficult in Germany to pass laws that only affect part of the community.  So you can tax people for driving a car for example, and you can give tax relief for driving an environmentally friendly car, but you cannot really offer car tax relief for someone on low income.  If they afford the car, then they can afford the tax!

The best example recently was the rule that you could only claim back tax on the cost of getting to work if you had to travel more than 20km each morning.  Anyone living closer lost out.  It took a couple of years and several court cases to get the rule revoked and tax rebates paid out to thousands of people.

In fact, income tax is one of the few taxes that I know of that has different bands rather than just percentages.

So the chances are, that someone somewhere would try to get a “wealth tax” that only affected people with a certain amount of capital overturned, because it was not treating the entire population equally.

Either that or the entire population would have to pay and even those with little savings in the bank would end up contributing towards the financial recovery in a way they would prefer not to.

Why it is the wrong way

The bureaucracy in Germany is extensive to say the least.  Surely there must be room for improvement here and ways of saving money without cutting services.  In fact, I have heard all sorts of ideas about this from the main political parties over the last 10 years, but none seem to come to fruition.

Instead of increasing taxes, it would be better to help companies improve their turnover – resulting in the long run for more income for the state.  In my opinion, increasing the VAT rate a few years ago was not the right decision.

Give the people money in their pockets by not taking it out in the first place, and the chances are that they will spend it or save it to earn interest.  Either way, it will be taxed.

What you may not know…

… is that Germany already has a wealth tax (Vermögenssteuer) – except that it was declared unconstitutional in 1995 and although it still exists in the tax statutes, it is not applied as present.

If the new Government really does want to re-introduce it, then they will have some hard thinking to do first.