German Profit Taxes. Christoph Freichel

average tax burden increase with the assessment basis.

      The basic tax rate is the tax rate that must be paid for the first Euro of the taxpayer’s assessment basis.

      On the other hand, the top tax rate is the highest tax rate provided for in a tax scale (= maximum marginal tax rate).

      The average tax rate results from the amount of taxes to be paid divided by the respective assessment basis. If the tax rate is expressed as a percentage, the result is to be multiplied by a factor of 100.

      The marginal tax rate or the marginal rate of tax is the tax rate at which the last (highest) unit of the assessment basis achieved is taxed. The marginal tax rate results from the first derivative of the tax function.

      The differential tax rate is the average tax rate levied on an additional part of the assessment basis (B_z). If the taxes on the assessment basis including B_z are depicted as S_z and as S for the taxes without this part of the assessment basis, the differential tax rate is calculated as (S_z – S)/B_z.

      The scale can be designed as a calculation scale or as a threshold scale (graduated scale). In the calculation scale, the rate that applies to the last unit of taxation shall apply to the entire assessment basis. In the case of the threshold scale or graduated scale, the assessment basis is broken down into portions, to which a certain tax rate is then applied respectively. The personal income tax scale in Germany is designed as a threshold scale. In 2018 the following scale applies:

•From € 0 to € 9,000:	Basis tax allowance; not subject to taxation (cf. Sec. 32a (1) sent. 2 no. 1 EStG)
•From € 9,001 to € 13,996:	Transition to linear-progressive development. The marginal tax rate increases from a basic tax rate of 14 % to 23.87 % (cf. Sec. 32a (1) sent. 2 no. 2 EStG).
•From € 13,997 to € 54,949:	Linear-progressive development with a quick increase in the marginal tax rate up to 42 % (cf. Sec. 32a (1) sent. 2 no. 3 EStG).
•From € 54,950 to € 260,532:	Proportional development with a marginal tax rate of 42 % (cf. Sec. 32a (1) sent. 2 no. 4EStG).
•Above € 260,533:	Proportional development with a top tax rate of 45 % (cf. Sec. 32a (1) sent. 2 no. 5 EStG), so-called wealth tax (Reichensteuer).

      Figure 6: Tax scale in 2018

       Note

      Only the top tax rate in Germany is 45 %. The average tax rate is regularly (significantly) lower due to the tax tariff.

       1.4.4Tax sovereignty

      The distribution of the tax revenue to the federal government, the federal states and the municipalities is regulated in Art. 106 of the Basic Constitutional Law of Germany (GG). Most of the tax types are assigned exclusively to an individual federal, regional or local authority (Gebietskörperschaft) named in the Basic Constitutional Law (divided tax system). The revenue from the most profitable tax types, especially the personal income tax, corporate income tax and value-added tax (community taxes), is, however, divided between the federal government and the federal states according to a set distribution key (combined tax system). The advantage of the combined system is that the distribution of the tax revenue to the regional authorities leads to the avoidance of multiple taxation by different levels. The tax sovereignty over the tax revenue can be classified as follows:

      Figure 7: Classification of the taxes according to the tax sovereignty

       Note

      The personal income tax and the corporate income tax are community taxes.

      The land tax and the trade tax are communal taxes.

      Summary

      The expenses of the state are predominantly financed by levying taxes.

      The legal definition of tax is contained in Sec. 3 (1) of the Fiscal Code of Germany (AO).

      Different disciplines of science have taxes as object of knowledge.

      Tax types:

      •Impersonal and personal taxes

      •Direct and indirect taxes

      •Classification according to economic factors

      •Classification according to the regional authorities entitled to the revenue

      Taxation terminology:

      •Taxpayer and/or taxable subject

      •Subject to taxation and/or taxable object

      •Tax base

      •Tax threshold/tax allowance/deductible amount

      •Tax rate/tax scale

      Questions

      1.Which disciplines of science deal with taxes?

      2.What types of income does the state receive?

      3.What kinds of levies can be distinguished?

      4.What is a tax allowance, what is a tax threshold and what is a deductible amount? What is the difference between the three?

      5.What is the difference between the marginal tax rate, average tax rate and differential tax rate?

      6.What taxes are levied solely by the federal governments, by the federal states or by the municipalities? What taxes are levied in the combined system?

      Literature

      Dietrich Grashoff, Florian Kleinmanns, Aktuelles Steuerrecht 2017 (Current tax law 2017), Munich, 13^th ed. 2017, pp. 7-16.

      Wolfgang Jakob, Einkommensteuer (Personal income tax), Munich, 4^th ed. 2008, p. 24.

      Dieter Schneeloch, Stephan Meyering, Guido Patek, Betriebswirtschaftliche Steuerlehre, Bd. 1: Grundlagen der Besteuerung, Ertragsteuern (Business taxation, Vol. 1: Principles of taxation, profit taxes), Munich, 7^th ed. 2016, pp. 1-42.

      Klaus Tipke, Joachim Lang, Steuerrecht (Tax law), Cologne, 22^nd ed. 2015,