Taxation in Germany is a complicated process. German tax system involves 118 laws, 418 exceptions, 185 forms and 96,000 policies. The tax system in Germany has been modified ample number of times due to political and corporate moves and as a result the system has become complex.
The total amount of income tax revenue earned per year is around €150billion. Two and a half percent of the tax revenue which is around €3.7 billion comes under the category of administrative costs since it is garnered from imposing income tax on the employees. To deal with the complex tax system people of Germany rely on the advisors to help them.
Types of Taxes
There are different types of taxes existing in the German tax system. The taxes are:
- Business tax
- Individual tax
- Wage tax
- Solidarity tax
- Church tax
- Income tax
Business or corporate tax rate in Germany is not very high. The corporations in Germany have to pay income tax as well besides Business Tax. The companies have to pay a fixed percentage of their income as income tax. The corporate tax was reformed in 2000 but the consequences were not up to the mark and there was a sharp decline in the tax revenue earned by the government. The corporate tax in Germany added to a total of €23.6 billion in 2000 and €2.9 billion in 2002.
Germany follows a progressive tax system. The taxes rates change depending on the income. Most of the industrialist countries follow this structure of taxation. Income tax is imposed on the salaries and the wages of the working population in Germany. The income tax rate has undergone reformation and has been reduced of late.
Taxes are levied on residents as well as non residents in Germany. If one has stayed in Germany for more than 183 days then he/she is liable to pay tax. If one's income is sourced from Germany then also the person is liable to pay income tax in Germany.
The tax rates in Germany vary depending on the tax agreement. In Germany the residents are entitled to pay taxes depending on their status. The rates vary if a parent lives single with her/his child and if the spouse dies within one year of marriage. The tax rate also varies for people who are self employed or people who have more than one source of earning.
There are other taxes in Germany like the wage tax, church tax and solidarity tax. Church Tax is normally 8-9% of the wage tax. The wage tax is charged on three ranges which are linear ranges. The range of tax is divided in zones known as the linear progressive zone.
The following table shows the zones and the incomes which come under the various zones:
|Income||Linear Progressive Zone|
|€7,664||No tax liability|
- VAT in Germany
- Inheritance Tax in Germany
Solidarity tax is calculated at a rate of 5.5% of the wage tax.
For the self employed the tax rate varies and normally they pay more tax than the service holders. However, they obtain a refund from the tax department later some time. It is beneficial for the self employed to buy insurances like life insurance, permanent disability insurance etc which allows deductions of €2100 from one's income. However, if that person is involved in some kind of trading then he is liable to pay the trade tax which varies between 10-16% depending on the income of the person and his location.
Utilization of the Tax Revenue
In the year 2006 the government of Germany declared that the tax revenue which the government will be able to garner, will be spent on various welfare and development programs. The purposes for which the German government decided to spend the earned tax revenue are the following:
- Social welfare for which €120 billion was allotted
- Clearing off existing debts with €40 billion
- For the maintenance of defense €24 billion was allotted
- For the purpose of traffic €24 billion was fixed
- Salaries and pensions of federal employees would be paid from €8.5 billion
- For the purpose of scientific research €8 billion was allotted