Volume 13, Issue 1-2

This paper reviews theoretical predictions on the likely effect of globalization on tax revenues and tax structures in developed countries. The predictions are then confronted with data from OECD countries. The evidence suggests that, in contrast to wide-held views, globalization only marginally affects tax revenues and structures. Most importantly, while it is often assumed that globalization would undermine national governments’ ability to tax mobile businesses, corporate tax revenue has increased over time. Overall, the tax systems in developed countries are highly stable in terms of both revenues and tax structure.

In this article we numerically explore the development of corporate tax burdens for the case of Germany during the time period between 1990 and 2010. We set up a model-firm approach, which allows us to account separately for many complicated tax provisions, such as earning stripping rules or loss-carryovers, in great detail and hence provide a comprehensive analysis of the tax systems in Germany, which extends the scope of existing literature. Furthermore, we present an analysis of the impact of the global economic and financial crisis on the effective tax burden of companies and evaluate the short-term measures introduced by the German government to support economic activity. Although the global economic crisis has posed hard new questions, it also offers an opportunity to accelerate structural tax reforms and restart the discussion on the design of corporate taxation in Germany beyond short-term policy responses. Therefore, we finally outline proposals to reform corporate taxation in Germany.

In Germany income from financial capital received by private persons is taxed at a reduced final withholding tax of about 25 percent whereas income from real estate property or business income is usually taxed at significantly higher rates up to 47 percent. Furthermore, there are special tax rules concerning returns from assurances and private pension plans. This article provides an overview of the current taxation of capital income in Germany by calculating costs of capital for the most common investment opportunities. While private pension plans and other assurances are considerably favoured by the tax system, equity-financed business investment is heavily discriminated against. The conclusions for real-estate taxation are ambiguous. This chaotic situation can be traced back to the coexistence of principally incompatible blueprints for capital income taxation.

The present article discusses the question of how to share the cost of higher education between the benefitting individual and the public optimally when labour income is taxed. Building on some previous work on the efficiency effects that income taxation has on human capital investment, the article demonstrates that in the presence of progressive income taxation a strong case can be made for the public to assume a fair share in the cost of higher education. The mix of private and public financing is shown to be efficient when the public share just neutralizes the negative effect that income taxation has upon the willingness to invest in higher education. The article then examines the efficient pattern of cost sharing in more detail. The article argues in favour of a two-part cost sharing scheme. The first part requires that the public subsidizes the cost of higher education to such an extent that the disincentive effect of progressive income taxation is neutralized. The second part requires that all remaining private expenditures are granted tax deduction against the income earned after studying. A particular virtue of the proposed two-part cost sharing scheme is that it gives individuals proper incentives to deploy effectively the stock of human capital acquired by studying.

The taxation of goods and services that are either non-tradable (such as local postal services) or only tradable to a limited extent is not subject to international tax competition. Hence, tax induced distortions of competition between different domestic firms can easily continue to exist even in an otherwise globalised economy. This article discusses two recent examples from Germany that illustrate the problem and demonstrate how consumption taxes can distort product market competition. First, the value-added tax privilege of Deutsche Post AG is discussed, and secondly, the air travel tax that has recently been introduced in Germany.

Based on a survey of the literature on the political economics of taxation we analyze in this paper with data for Switzerland which tax instruments are less intensively used when tax policy is restricted by tax competition and direct democracy. Both institutions restrict government revenue according to our results. In particular, Swiss cantons finance their government activities less by broad-based taxes, like personal income taxes, than by user charges. Both institutions thus enforce a stronger government financing according to the benefit principle instead of the ability to pay principle.