This brief overview provides basic international comparisons of certain major tax types. The figures for the key tax types are taken from the new edition of the Federal Ministry of Finance’s German-language brochure Die wichtigsten Steuern im internationalen Vergleich 2018 (“Taxes: an international comparison 2018”).1 The comparisons cover the EU member states plus several other advanced economies (the United States, Canada, Japan, Switzerland and Norway) and generally reflect the state of the law in these countries as at the end of 2018. The tax ratios, which are published by the Organisation for Economic Co-operation and Development (OECD), are based on the most recent comparative data from 2017. The comparisons do not include planned or adopted tax-related measures that will not have an effect until 2019 or later. It is important to point out that, for many comparisons, meaningful conclusions can be drawn only if the full context is taken into account. For example, it is particularly important to understand how nominal tax rates interact with variously designed tax bases in different countries.
Aggregate tax ratios, which show the amount of taxes paid in relation to a country’s GDP, provide a useful tool for making international comparisons of the taxes charged and collected in different countries. However, it is important for such ratios to take into account not just pure tax revenue but rather the revenue from both taxes and social security contributions. This is because the countries compared in this overview have different ways of financing their government-operated social security systems, i.e. they finance these systems to different degrees through general budget funds and hence charge higher tax rates or through social security contributions that are separate from income taxes. It is only when one looks at the ratio of taxes and social security contributions to GDP – known internationally as the tax-to-GDP ratio – that meaningful international comparisons can be made.
Figure 1 shows that the tax-to-GDP ratio (as defined by the OECD in its Revenue Statistics reports; the most recent comparative data is from 2017) is relatively high (over 40%) in most Scandinavian countries as well as in France, Belgium, Italy and Austria. By contrast, Ireland, the United States, Switzerland and Lithuania have relatively low ratios (below 30%). Germany’s tax-to-GDP ratio is in the upper mid-range (37.5% in 2017).
Taxation of corporate profits
When it comes to international comparisons of corporate taxation, nominal tax rates can certainly have indicative value. But it is not until official tax rates are combined with tax bases that one is able to arrive at the actual or effective tax rate. Due to the schematic nature of this overview, our comparison is limited to official tax rates on corporations.
In 2018, a number of countries lowered their nominal corporate income tax (CIT) rates (the United States, Belgium, Luxembourg and Norway). Only Latvia raised its CIT rate. In the rest of the countries under review here, the nominal standard rate remained unchanged. Figure 2 shows the corporation tax rates that applied in 2018 (excluding taxes levied by subnational authorities).
In a number of countries, subnational levels of government (such as states, provinces, regions and local authorities) charge their own corporation taxes (or similar taxes such as trade tax in Germany and Luxembourg) in addition to the corporation taxes levied by central governments. Surtaxes are also charged at various government levels. The total percentage amount of all corporate taxes that use profits as the basis for determining the tax base is shown in figure 3. It is important to note that, in some countries (such as Japan and the United States), the taxes collected by local authorities can be deducted from the tax base applied by higher authorities. As a result, the total corporate tax burden is determined on the basis of a gradated calculation and not simply by adding up the nominal rates of the relevant individual tax types. In 2018, the total tax burden on corporations ranged from 10% in Bulgaria to over 34% in France (excluding Malta, which is a special case with its own special rates and rules; in 2018 France began applying a reduced rate for profits up to a certain amount). In Germany, the total corporate tax burden remains just under 30%.
Income taxes and social security contributions levied on employee earnings
The OECD publishes a regular report that provides international comparisons of the taxes paid by working households, broken down into various family constellations and income groups. Figure 4 shows income tax in 2018 as a percentage of gross wages earned by working households, which are classified according to various family constellations (unmarried, single-income families, dual-income families). In many countries, measures relating to the taxation of families are designed to benefit families with children (and this is clearly discernible in Germany when it comes to people with average earnings, primarily as a result of child benefit). Figure 5 takes employee and employer social security contributions into account in addition to income tax, and thus provides an illustration of taxes and social security contributions as a total share of labour costs.
In 2018, VAT rates remained unchanged in most advanced economies. Compared with the rest of the EU, Germany’s standard VAT rate of 19% remains in the lower half (see figure 6).
The tax system in Germany is fair overall and aims to provide sufficient incentives to engage in economic activity. The taxes and social security contributions that people pay in Germany come with a level of public services that is appropriate for a highly advanced economy. In particular, people in Germany benefit from well-developed social security systems and public infrastructure that is largely free of charge (including schools, higher education institutions and, increasingly, childcare facilities). In the current legislative term, reductions in taxes and social security contributions are also increasing the disposable income of families and lower and middle income groups, in particular, as well as boosting incentives to work.
When companies are looking for places to do business, they not only look at tax rates but also focus in particular on the “input” side of business sites, which includes factors such as infrastructure, employee skills/qualifications, public safety and public administration efficiency. German companies are competitive and successful on international markets; liquidity and financing conditions also remain favourable. When it comes to corporate taxation, Germany will not join or support a race to the bottom. Instead, the German government is focusing on targeted measures to make the tax system more conducive to growth and investment, for example by introducing tax incentives for research and development. In addition, Germany is pursuing greater tax fairness at the national and international level. As an example, Germany and France are working together to introduce a global minimum effective tax rate, so as to address the challenges of taxing the digital economy and make further efforts to combat tax planning and tax avoidance in an effective way.