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Debt and Democracy: Why Germany's Rich Must Pay Higher Taxes

A Commentary by

Germany is a land of inequality. The gap between rich and poor has widened, and cutting public services to balance the budget will only make things worse. If we're serious about saving German democracy, we have to raise taxes on the rich.

A stockbroker drinks champagne at the Frankfurt exchange. Germany's rich need to pay higher taxes. Zoom
AP

A stockbroker drinks champagne at the Frankfurt exchange. Germany's rich need to pay higher taxes.

A crisis is a turning point. In medicine, when a disease is at its worst, the patient's future hangs in the balance. The doctor does what he or she can, then waits to see if the crisis results in a recovery -- or death.

We know how the death of our society will look from the recent riots in London. We are threatened by social instability, which could lead to societal collapse and anarchy -- our own private Somalia. To avoid that will require a serious effort by the powerful. Our system needs a complete change of course. A politics of inequality got us into this crisis. If we keep going down that road, it will cause our downfall.

It's time to use the crisis as an opportunity for change. It's high time, in other words, to raise taxes.

Germany is a land of inequality. That's not some left-wing dogma, but a simple fact. Our system leads to a "redistribution of wealth from poor to rich." That was the recent conclusion of Paul Kirchhof, a conservative law professor and tax expert who Angela Merkel once wanted to appoint as finance minister. If our political system is to survive in the long term, something needs to change.

Let me describe the current situation with a few figures. The 5,000 best-earning German households have increased their share of the total national revenue by about 50 percent since the mid-1990s. At the same time, the real income of all Germans has remained about the same over this period. The net share of wages -- that is, the share of national income accounted for by wages -- was about 44 percent in West Germany up until the 1980s. Ten years later, it was just over 38 percent. Now it's about 35 percent. In the same period, the portion of income accounted for by profits has continually risen.

Huge redistributions are happening. That's a fact that has been known for some time. But most of us have just sat around and watched. Why? Because the ideology of privatization, small government and neo-liberalism has permanently fogged the minds of a generation.

Spoiling the Rich and Placating the Poor

But the ideology has started to show cracks. Writing in the Sunday edition of the heavyweight conservative newspaper Frankfurter Allgemeine Zeitung recently, the prominent German journalist Frank Schirrmacher argued that a decade of economic policies based on loosely regulated financial markets is proving to be the "most successful" way to make the left-wing critique of free-market capitalism, which had fallen out of favor, popular again.

It's not the power of left-wing arguments that has brought capitalism to its knees. Capitalism has grown for so long that it has reached the point of being incompatible with democracy. We live in a system where the few profit but the many do not. But in a democracy the majority are still needed at the ballot box every few years. They're expected to give their votes -- and then keep quiet. In return for this service, the state hands out (ever-smaller) benefits from the public treasury. But where should the money come from, if the rich and the corporations pay fewer and fewer taxes and keep their money for themselves, while the poor pay no taxes because they have no money?

Answer: debt. Public debt is the price paid by countries to allow the rich to grow richer while the poor grow poorer. This system has now come to the end of the road.

A strategy of spoiling the rich and placating the poor can't work any longer. The only choice now is to raise taxes or cut spending.

But if the government cuts spending, inequality will rise. Whether it's schools, public swimming pools, libraries or hospitals, the wealthy don't care if these public institutions are in a good condition. But everyone else does. Popular rage will grow. We can imagine where it might lead in Germany -- toward the far right. If the government cuts spending, it will not reform the system in the direction of more democracy. Instead, it will push it toward totalitarianism.

If we want to save our society, there is only one answer: to raise taxes. The top tax bracket in Germany is lower than ever. In the past, 53 or 56 percent were normal levels -- now the maximum rate of income tax is 42 percent. The rich person who takes advantage of all possible tax breaks pays just over 30 percent. That's crazy. The state can no longer afford to make do without money from its wealthiest citizens.

The Berlin economics professor Giacomo Corneo has called for a tax bracket of 66 percent for the nation's top earners. He's right.

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1. Thank you Herr Augstein
ReneGayde 08/26/2011
I am very impressed with Herr Augstein’s insight and eloquence. What he has to say about Germany is equally applicable to the United States of America. We Americans are in much the same situation and the Wealthy refuse to believe or understand that their actions both fiscally and governmentally during the past 31 years have created a social and economic time-bomb that is about to destroy this country as well. The time frame, which Herr Augstein uses for the development of the economic/social problems in Germany, matches very closely the time frame for these same problems in the United States. With the election of Ronald Reagan in 1980, the Republican Party began to systematically dismantle the federal regulation of the financial institutions and large corporations, while simultaneously lowering the tax rate for the Wealthy and these same institutions, and corporations. Not only are the Wealthy not willing to pay for the “entitlement programs” such as retirement, minimum income, and medical care for the poor, they are raiding and destroying these same programs for the middle class as well. From 1950 until 1980, the United States National Debt held at approximately $2.5 Trillion (in 2010 US dollars). During the next 28 years, 20 years of which were during Republican Administrations, the US National Debt rose $7.5 Trillion to a total of $10 Trillion. In 1950 the highest tax rate on the Wealthy was 91% and gradually decreases over the next 30 years to a rate of 70% in 1980. Currently and for the past 10 years the highest tax rate in the United States is and has been 35%. These rates are the maximum rate allowed, but with tax exemptions calculated into the mix, many Wealthy individuals pay little or no taxes at all, as is the case with most of the major corporations and financial institutions. So, during a period when the Republican Party was cutting the tax rate on the Wealthy by 50%, they were simultaneously increasing the National Debt by 300% and are not interested in repaying any of it out of their own pockets. I cannot but agree with Herr Augstein’s conclusion about the inevitable decline into totalitarianism unless the Wealthy are required to pay a higher tax rate on their incomes, which have become increasingly egregious and obscene. I might add that the lax regulation of industry and financial institutions must end also for there to be any meaningful hope of an equitable resolution to these problems.
2.
skyduke 08/26/2011
This is idiotic. 90% of the "poor" can work. They just don't want to. There ARE jobs out there, but people don't want to work for McDonald's; they prefer sitting on their asses and getting money from the state. These people don't even remotely think about the fact this money comes from the taxes of others. People who work do; and they see their salaries almost cut in half because they need to support parasites. I of course agree on the principle of social aid, but it is much too easily abused. And if you really think you can raise taxes on the rich, think again. I know a lot of rich people: contrarily to what most believe, they are not soul-sucking demons of capitalism. They don't mind paying taxes; but when you see punitive levels (like in Belgium! 50% when you earn more than 35k euros a year), they balk, and hide their wealth. I cannot blame them. The rich and the poor have always existed; if you try to make the field level by draining the rich and giving to the poor to the point where they don't actually NEED to think "Hey, it would be nice if I got new skills and/or an education, that way I can earn more", the only thing you are doing is encouraging mediocrity and laziness. And there will be no incentive for people to "get rich" : why work hard and have responsibilities when all you get is a gigantic portion of your income siphoned off? Much better to keep doing a 400 euro mini-job, and get money and health insurance paid for by the state. I live in Germany, in one of a few towns that is totally debt free. Do you want to know the shocking, amazing recipe the mayor came up with? Don't spend what you do not have. This applies to individuals, I do not see why people think it does not apply to municipalities and states. If social aid is too expensive, and you cannot pay for it, then cut it. The right balance between deficit cuts and taxes needs to be found. Simply saying "the rich must pay more" makes the author of this article sound like a (pardon my french) clueless moron. It's always easy to tell others they must pay, isn't it? And before you go thinking I'm rich...I work at Mcdonalds in a very low position.
3. No taxation without solidarity
Eleos 08/26/2011
A prerequisite for progressive taxation that takes from the rich and gives to the poor is the empathy that comes from a feeling of solidarity with your fellow citizens. Multiculturalism has greatly diminished this.
4. Bs
Vitsing 08/27/2011
This is a leap of faith that closely mirrors our own US socialists, liberals and progressives who are seeking a new world order. The Soviets tried redistribution of wealth to make everyone equal and managed by a central dictatorship. It did not work there, it won't work in the US and I doubt it will work in Germany. There will always be very hard working individuals who given their creative minds will make money. Taking their wealth to redistribute to those that are less productive only leads to economic failure.
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