Corona, debt and the black zero

The cost of the economic crisis as a result of the Lockdowns leads to an economic crisis worldwide that will probably blow up everything we saw in the post-war period. The impact on public finances is already huge. For this year alone, tax revenues are expected to decline by three-digit billions. However, tax increases for top earners are still taboo. Instead, a campaign for Tax Cuts is currently underway. At the same time, however, they insist on continuing to follow the ideology of the Black Zero. The result of this toxic mixture will probably be savings on a scale never seen before.

A campaign for Tax Cuts is currently underway again – initiated by a “study” commissioned by the Bavarian Ministry of economic affairs of the IFO institute, launched by Markus Söder and presented by BILD. Of course, the corona crisis plunges the economy into a deep valley and an economic stimulus would make sense. But is a reduction in income tax such an impulse? And does that even make sense?

Unlike, for example, excise taxes such as Value Added Tax, the income tax is very clearly staggered by the amount of taxable income. According to information from the Federal Ministry of finance, the higher – income half of households currently contribute 95.2% of the fixed income tax-the top percent alone contributes 22.9%. However, this also means that a reduction in income tax across all areas will primarily benefit high-income households, while the lower-income half of the population will almost run out of money. In concrete terms, of course, the question arises whether it will help the economy if the wealthy households, of all people, who are still doing well under the consequences of the lockdown and the collapse of the world economy in comparison to the army of short-time workers, new unemployed and precarious workers, are additionally subsidised by the state.

In addition to the direct consequences of the lockdown, the economy will suffer for a longer period, above all because demand is collapsing. Those who, as short-time workers, forgo parts of their income, become unemployed or, as a smaller self-employed person, have to contend with a slump in income, of course also lack the money to buy things that are not urgently needed or to use services. The frozen pizza has to be enough and the restaurant visit has to be cancelled and the renovation of the old bathroom has to be postponed to the last day. The crisis will thus spread to other sectors that already exist, such as gastronomy and crafts.

With a reduction in income tax, the slump in demand will therefore hardly be remedied. Added to this is the time factor. Finally, the fixed income tax usually refers to the previous year. If the federal government – hypothetically speaking – were to reduce income tax on June 1, the saving effect on the tax year compensation would not be visible in most citizens ' accounts until the next tax return in spring 2021. This is not the necessary fast impulse.

Incidentally, even the Ifo Institute suspects this and goes one step further in its recommendations for tax cuts. Therefore, Institute director Clemens Fuest pleads for a” significant expansion of the loss return”, which he considers” particularly promising”. This formulation may be incomprehensible to many readers. What Fuest is proposing here is nothing else than that the losses from this spring can be offset against the profits of recent years and that companies and – usually high – income-individuals who have income from various sources and can claim losses for tax purposes can subsequently reduce their already determined tax burden from recent years. In practice, this means that the tax authorities will not only have to adjust to lower tax revenues in this and the next few years, but will even have to pay back parts of the tax revenues from recent years to certain companies and individuals. The big Run on public finances would be heralded. Unfortunately, however, this debate is taking place completely under the Radar of the public. The current heated debate about Corona, demonstrations and the exit strategy from Lockdown offers a grateful distraction.

The federal government currently expects the gross domestic product to decline by 7.25% for the current year, while the government debt ratio is expected to rise from the current 60% to 75% thanks to lower revenues and additional expenditure. This is a debt increase of 15% in one year! We remember – according to the Dogma of the Black Zero, new debt is allowed in times of crisis, but the newly taken up debt must be repaid afterwards. How high this sum will be at the end is currently not to be estimated seriously; it could be 300 billion euros, but it could also be several trillion euros in the event of a prolonged global economic crisis. And even the dumbest voter should be aware that the state cannot repay this debt if it cuts taxes on the one hand and does not want to increase spending on the other. This would only be possible if the economy grew rapidly, which is the exact opposite of the scenario expected in the coming years.

The corona crisis has thus brought us to a point that we in Germany actually thought had long since been overcome and at which the Black Zero can cause even greater economic damage than it has already done in recent years. And Germany is only a small part of a large network of states that have more or less voluntarily submitted to an “austerity regime”. According to the IMF, the twenty largest industrialized nations have already mobilized eight trillion dollars to combat the crisis. The Italian government debt ratio alone is already expected to have risen from 135% to almost 160%, although this is far from the end of the road.

After the crisis is before the crisis. Even if the European states end the Lockdown in a few weeks ' time and jointly restart their economies fully, the process will be slow due to the global decline in demand alone and leave massive traces in the public finances. For the ideological guardrails of the Eurozone, it is hardly conceivable that this will continue. Or do countries like Italy, Spain and France, whose economies are suffering massively from the corona crisis and the Lockdown, want to seriously require that they first restructure their public finances and adhere to the “Stability Pact”? How does an export-oriented economy like Germany want to get back on its feet when our best customers have to save?

“May you live in interesting times” is a Chinese proverb. Unfortunately, the next few years will not be boring. On The Contrary. If the governments again unload the costs of the crisis on the backs of the weak and thus further force the already grotesque inequality of wealth, the consequences could be disastrous. The corona crisis – also thanks to wrong political decisions-alone will cost the German taxpayer a high three-digit billion euros. Who should pay for it? The Poor? The Weak? The struggling middle class? No, in a fair society, these burdens would have to be borne by the strong shoulders and this can be achieved not only by taxing wealth, but above all by increasing the taxation of high incomes. Tax reduction debates are completely out of place – at least when it comes to a general reduction of taxes, as advocated by Söder. One could certainly talk about an increase in the basic allowance, from which even small and medium-sized incomes would benefit. But that’s not what the current debate is about.

Both in the good and in the less good old days, governments that set great store by not being led by the people to the scaffold have made financial commitments, especially to the wealthy citizens of their country. This was the case in the United States when President Roosevelt raised the top tax rate to 63% in response to the Great Depression in 1932. At the same time, Reich Chancellor Brüning implemented a comprehensive spending reduction programme in Germany. The United States was able to cushion the consequences of the crisis through tax-financed economic stimulus programs, mass unemployment occurred in Germany and Adolf Hitler used this hardship in the population to put an end to Weimar democracy. You don’t have to paint the devil on the wall. But sometimes it would be nice to learn from history.