Short-time work, hardship funds, Corona relief fund – many grants and financial support accompany us in the last few months and take entrepreneurs to the limits of their patience and performance. Under the cover of the Corona aid package, European governments have reacted quickly, secured jobs and strengthened the business location – “whatever the cost!
But is this really so? Have we strengthened the location or weakened it in the long term? Where does the money for the measures taken come from? How are the billion-euro aid packages adopted by the government financed? Do we have to adapt to new taxes?
Yes, because there is no other way to finance these measures, which are necessary from today’s perspective and important for companies. In order to understand the possibilities for possible tax reforms, we should first take a closer look at the meaning and purpose of taxes.
Taxes are defined as monetary payments in the form of “compulsory levies” to the state, which are not matched by any direct consideration. They serve primarily to finance the state, but in some areas they also have a steering function. If the state wants to promote or prevent a certain behaviour of the citizens, it can do so by means of low or high taxes. An example of this would be the tobacco tax, which is intended to reduce the unhealthy use of cigarettes and curb smoking.
Another important function of fiscal taxes is redistribution to ensure social justice. In income tax, this function is reflected in the progressive tariff levels. Low-income taxpayers are subject to a lower tax burden in percentage terms than those on high incomes. The aim is to provide financial relief for low-income earners. This also takes into account the principle of efficiency, which is intended to require every citizen to pay taxes according to his or her ability to pay.
We do not know what “new” taxes might look like. In any case, the mace of property taxes, inheritance and gift taxes is once again being stirred up in party politics as the “contribution of the rich”. And in Germany, in addition to inheritance and gift taxes, there is also the so-called solidarity surcharge – a model of supposedly temporary taxes that is currently being eyed with interest in some European countries.
The solidarity surcharge – as a means of redistribution – is a surcharge on income or corporation tax. The basis of assessment is the wage or income tax or corporation tax to be paid. In 2019, the solidarity surcharge in Germany generated 19.65 billion euros in additional tax revenue, which corresponds to around 2% of total tax revenue. The main reason for the introduction of the solidarity surcharge in Germany was initially the additional costs incurred by the reunification of the two German states. The abolition of the “Soli”, primarily for the lower income classes, has been discussed for years. Whether it will be enforced in 2021 as planned is also a question mark in Germany, given the costs of the Corona crisis. In any case, the solidarity surcharge is a good example of an additional tax, especially for higher earners. In view of the fact that 30 years of German unification are being celebrated this year, the temporary nature of this tax is no longer obvious.
Already brought into play as a suitable election campaign topic before the Corona crisis, the discussion about property taxes is now also being rekindled in Austria. Wealth tax is to be based on the taxpayer’s total assets, but only when a certain threshold for exemption is exceeded. The Johannes Kepler University has published a study on this subject. According to this study, only 4-7% of the Austrian population would be affected by this tax. According to the study, the richest percentage of Austrian private households has a share of 40.5% of net assets, i.e. 534 billion euros. If a wealth tax of 0.7 to 1.5 percent were introduced for net assets over 1 million euros, one could expect 5.7 billion euros in tax revenue. This also takes into account any evasion effects, e.g. the shifting of income abroad.
On the basis of these figures, many would support such a measure, which is also the result of a survey of Austrians regarding the financing of the consequences of the Corona crisis. In this survey, 73% of those questioned were in favour of introducing a tax on assets over EUR 1 million.
But what is often forgotten in the whole discussion about wealth tax is that wealth must first be created and for this purpose income must be earned. This is subject to income tax and has therefore already been taxed. An additional wealth tax would therefore lead to a double burden and tax the same wealth twice. Especially for entrepreneurs who own business assets and real estate, assets could be available for taxation, but still have no financial means to support them.
An example of this is Switzerland, where wealth tax – which is regulated at cantonal level – in “expensive” cantons for very wealthy individuals occasionally results in annual income being lower than the wealth tax charged on the assets.
The consulting firm KPMG therefore set up a calculation example years ago, and calculated that Mark Zuckerberg would have had to pay around CHF 250 million in wealth tax even before his IPO, and would probably not have been successful with his company in Zurich.
In Spain, an upper limit was set to prevent such effects. The total amount of income and wealth tax may not exceed a certain percentage of the income tax assessment base.
It is also interesting to note that in 2017 only four countries (Switzerland, Spain, France and Norway) had a “real” wealth tax. On closer inspection, practically all OECD countries are familiar with the taxation of real estate, which is the most effective form of wealth tax.
Like Germany and other OECD countries, Austria has also been aware of the taxation of capital gains since 01.04.2012, which achieves similar effects to a wealth tax, without the negative effect of the wealth tax that taxation also takes place in the case of losses in assets. And above all without using the politically controversial term “wealth tax”.
At first glance, the much-discussed inheritance and gift tax also appears to be a suitable means of filling the holes in the state coffers. Similar to wealth tax, the question is whether an inheritance and gift tax, which is not being discussed for the first time, can help to restructure the state budget. By international comparison, a trend towards abolition rather than (re)introduction is discernible. Austria was a pioneer with its abolition in 2008. But what is the point of the inheritance and gift tax?
Inheritance and gift tax is a tax that is levied on transfers of assets on account of death as well as on gifts between living persons. In Austria, the tax rate until 2008 was between 2% and a maximum of 60%, depending on the personal relationship of the purchaser to the testator. In addition, tax exemptions and reductions were also established, such as a tax-free allowance of up to EUR 7,300.00.
The income from inheritance and gift tax thus reached “only” EUR 140 m. Inheritance and gift tax will thus tend to contribute little to the “together we can do it” programme. But the signal effect seems even worse. For in a crisis situation, in which many entrepreneurs are struggling to react with a tax on assets (wealth tax, inheritance tax or gift tax), it will not be possible to put out the conflagration.
Without new taxes it will probably not work either and it is questionable whether the mere boosting of the economy will be able to absorb the enormous financial aid measures. However, the steering effect of taxes should not be underestimated. A tax-motivated migration of assets abroad would probably not only have devastating tax consequences, but would not do the respective business location any good in the long term.
It can therefore be assumed that there will be fewer taxes from individual states, but that other, more imaginative financing solutions will be discussed or worked out at EU level, which is currently putting together an aid programme on an unprecedented scale for the southern EU member states. This will lead to a distribution of the tax burden within the EU.
Cyprus provided a practical example in this respect. Under the pressure of the donor troika from the EU, the European Central Bank (ECB) and the International Monetary Fund (IMF), Cyprus had to agree to the participation of private bank customers in the rescue of the island banks. Deposits over EUR 100,000 were first taxed at 37.5% and three months later a further 10% was charged on the original balance. Wealthy customers thus lost almost half of their deposits, with the bank’s bonds also being converted into virtually worthless shares.
Jeroen Dijsselbloem, then head of the EURO group, immediately declared in interviews with the “Financial Times” and the news agency Reuters that the participation of shareholders, creditors and major customers in Cyprus’ bank rescue was a model case. The Dutchman announced that the private sector must prepare itself to be called upon for future rescue operations in other countries. This is not an isolated opinion.
Other examples from recent history are forced bonds, which the Bundesbank demanded in 2018 for rich Italians and which Spain has already introduced, one-off levies or long-term additional property taxes on real estate not used by the owner – e.g. the Equalization of Burdens Act of 1952 in Germany.
The concrete prospects for new taxes are still uncertain, but our common sense urges caution. As always, the measures and actions required in these times depend on individual circumstances.
By tax consultant MMag. Ferdinand Rossbacher and Dr. Clemens Gregor
