Economist Clemens Fuest is President of the Ifo Institute in Munich. He is Professor of Economics at the Chair of Economics and Public Finance at the Ludwig-Maximilians-Universität München.
ZEIT ONLINE: Mr Fuest, we are approaching a slowdown, everyone is talking about more investments. Finance Minister Olaf Scholz has now put forward a proposal to abolish the solidarity surcharge for a large part of the taxpayer population. Is this the right time for tax cuts?
Clemens Fuest: It is right in the current situation to reduce taxes. Postponing tax cuts announced in a downturn to have more headroom for spending would be counterproductive. But that is not the main reason why the solidarity surcharge has to be abolished, but: there was a firm pledge by politics to do so. The solos should only be collected for a limited time, especially to finance German reunification. But now it's almost 30 years old. It's about the credibility of politics.
ZEIT ONLINE: Nevertheless, the state lags behind in the expansion of infrastructure, in schools or day-care centers. Can you get away with tens of billions of euros of tax revenue?
Fuest: The argument is not convincing. Public investments are not failing at the moment. The tax revenues are at a record level, the tax rate has been rising for years. Money is sufficient, but it does not flow fast enough. The problem is often that there is resistance to new projects in the local population, resisting new power lines or rail lines. The extensive participation of the population, which is actually something positive, meanwhile delays investment projects very strongly. In addition, the construction industry is still heavily used. Even if there is a downturn in the autumn, it is not possible to counteract this quickly with new public investment. The soli-abolition could be preferred, which works immediately.
ZEIT ONLINE: Now the solidarity surcharge should not be abolished for all taxpayers - the richest ten percentages continue to pay him. What do you think of this model?
Fuest: Little. The solos should be abolished without any ifs and buts for all taxpayers. Above all, he was a special sacrifice for the better off part of the population. It is also fair if the sacrifice is greatest for those who earn the most. But if an agreed special offer expires, that should apply to all. Apart from that, politics obviously has the right to introduce a higher top tax rate. But in democracy you need a majority for that, and that is not present at the moment. Now you bypass this decision and use the solos for hiding a higher top tax rate.
ZEIT ONLINE: Wait a minute, the top earners will pay no more taxes than before, but only in relation to the rest of the population.
Fuest: That's right, but the argument is that you want to keep the top earners alone to pay the special sacrifice. And that has nothing to do with justice. Anyway, it is unclear whether the Federal Constitutional Court will let this pass.
ZEIT ONLINE: In the model proposed by Olaf Scholz, there should be between the 90 and the ten percent of taxpayers a glide zone in which the soli tax rate increases. How exactly should this work?
Fuest: The problem is that you can not get rid of the solos for 90 percent of the taxpayers and leave them unchanged for the remaining ten percent because that would give them a jump. That is: Who with his income is just below the limit and then earns one more euro, would immediately pay back the solos in full. More gross income would then result in less net income. To prevent that, you need the sliding zone. However, the shorter this glide zone is, the faster the burden on those who are in it increases. Therefore, according to the minister, the transition area is to be extended upwards, so that part of the top ten percent will pay less solos than before. I think that's reasonable.
ZEIT ONLINE: And with this sliding zone is to be achieved that the new law has before the Federal Constitutional Court?
Fuest: I'm not a lawyer, but I think it's unlikely that the glide zone will help the Constitutional Court. There it will be a question of whether it is possible to permanently levy a temporary federal tax surcharge for a part of the population.
ZEIT ONLINE: You say yourself that the Soli in itserbisherigen form the most burden on the best earners. That is, would be abolished, whether for all or for 90 percent of taxpayers, then the discharge would not necessarily flow into consumption. The higher earners would probably just leave the extra money in the account. Could the abolition then have any effect on the economy?
Fuest: Reason for the abolition would not be the economic policy effect - but that would not equal zero. The impact on spending does not depend solely on income. In the lower income areas, the effect may be weak because people who are behind, for example, with installment loans are using tax relief to service the loans, as empirical studies have shown. In the upper income areas also companies are relieved, which also pay solos, especially medium-sized and large partnerships and capital companies. If these companies have more money at their disposal, it can lead to more investment.