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Over the last ten years, tax revenue in Germany fluctuated greatly and, at times, unexpectedly. This was due, in particular, to the extremely volatile nature of profit-related taxes. Overall, the tax ratio rose and, at the end of the period under review, was high even by historical standards. This rise was driven by increases in consumptionrelated taxes, which significantly outweighed the tax relief which was granted predominantly by the reform of income tax and business tax in 2000. By contrast, the combined tax and social contributions ratio declined on balance. The increased allocation of taxes towards co-funding the social security schemes was one of the factors which contributed to the diverging trends in the tax ratio and the combined tax and social contributions ratio.
An efficient tax and social contributions system and a contained tax burden are essential for creating an environment conducive to growth. A more transparent system could help improve the degree of public acceptance and reduce distortions. Thus the need to lower tax rates and limit special provisions for many types of taxes remains on the tax policy agenda. Furthermore, the degree of equivalence between social contributions and corresponding insurance benefits for the contributor could be strengthened by adopting a coherent strategy of tax-funding noninsurance-related benefits.
General trends in the tax ratio and the combined tax and social contributions ratio over the last ten years
Tax ratio volatile and higher overall
Over the course of the last ten years, Ger- many has seen some extremely volatile and erratic developments in its tax revenue. This has been a major contributory factor to the considerable fluctuations in the general gov- ernment deficits. Sharp revenue growth from 1997 up to the turn of the century was fol- lowed by a phase of decidedly weak revenue growth against the backdrop of an unfavour- able macroeconomic momentum and com- prehensive income tax cuts. This situation only reversed around the middle of the cur- rent decade and was notably reinforced by the substantial additional revenue ensuing from the raising of the standard VAT rate last year. By the end of 2007 the tax ratio, that is tax revenue in relation to gross domestic product (GDP), again edged closer to the high level recorded in 2000, which is also...