How citizens could benefit from tax reforms and the international stock market
The economists Prof. Dr. Claudia Neugebauer and Prof. Dr. André Betzer on tax expenses and savings
"The art of taxation is to pluck the goose in such a way that it leaves as many feathers as possible with as little yelling as possible," said the French Finance Minister of Louis XIV, Jean Baptiste Colbert as early as the 17th century. Not much seems to have changed, if you look at the German tax landscape in the 21st century, where employees still seem to leave quite a lot of feathers. The German state grabs deep into the pockets of its citizens with high taxes and social security contributions. If you add it all up, the state collects about half of the income. If you convert all the tax shares to the year, the result is: Citizens start working for their own account only in mid-July.
Wuppertal University Professor Claudia Neugebauer from the Chair of Public Finance and Taxation sees things completely differently and explains the benefits of taxes and tax revenues for society. "A large part of our money is freely available to us," she emphasizes. "The taxes are already used to pay for our health insurance, nursing care insurance, unemployment insurance and pension insurance through the statutory system. All this is already included in these amounts." She also questions the income burden ratio of 52.1% for 2020 mentioned by the Taxpayers' Association. In the current OECD (Organization for Economic Cooperation and Development) analysis, the figure for a married person with children is 33%. Among other things, it must be noted that children and spouses with no income of their own are insured free of charge by the purchaser.
We smoke for health - we die for education
Many taxes would not apply to every citizen and could not be included in the calculation. The land transfer tax therefore affects those with real estate ownership, the tobacco tax is paid only by smokers, whereby the tobacco tax even finances pension insurance benefits. "Within the tax range one always says: We smoke for the health," an apparent contradiction which Neugebauer find also for the inheritance tax, because there one dies for the education, "because the inheritance tax is a federal state tax and from it again also the university is financed."
These two examples already demonstrate the intransparency of a system with more than 40 different taxes, with which even experts have their difficulties, but which is beneficial to society, because the immense state revenues also benefit the citizens. One question, however, which Neugebauer completely ignores is: "What happens with the money?", and she explains, "especially in the current times, we realize that if we fall ill, for example, even with corona, we don't have to worry about not getting the best care. We also don't have to worry that we will be indebted afterwards. We have cushioned all that." The system finances unemployment benefits, short-time work benefits as well as child and parental benefits. "You also have to ask yourself how all this is financed? What do you want from the state?" And the demands in Germany are quite high in this respect.
Flat rates could be more generous...
In the pandemic, many employers offer the possibility of a home office, and so the idea arises whether in this context a flat-rate allowance for advertising costs could perhaps also help to relieve the burden on citizens. "We already have something like that," says Neugebauer, because there is a flat-rate amount for a workroom of 1250 euros if we do not have a workplace available at the employer. The classic is the teacher. "He has his job at school, of course, but a teachers' room is not a study. He has to do all the preparation and follow-up work outside school." That's why this professional group has long been able to make use of this regulation. The cap on this flat rate is based on the protected private area. "Every time we claim advertising costs in any way, the state naturally has an interest in whether this is correct. But going into the apartment to check the workroom is a process that I have very rarely experienced. These are extreme cases," Neugebauer knows. "I do work in an office at the university, but we also have the employer's recommendation to work from home if possible. And if you take this criterion at the moment and you could claim the office for these purposes, it would be a reasonable consideration." Therefore Neugebauer pleads for a relaxation of the conditions that no other workplace would be available. If one credibly asserts that the workroom is not in the kitchen or the children's room, the flat rate should be able to be taken into account.
Tax types are difficult to reform
The list of German taxes is long and not necessarily known to every citizen. "Some taxes have also grown historically", explains Neugebauer. "Why do we have a tax on sparkling wine, a tax on beer, but no tax on wine? Why do we have a dog tax but no cat tax?" Also, some types of taxes, such as inheritance tax, are so complicated even for experts that a simplification of the system would bring considerable improvements. "Moreover, we have a federal system. Taxes are not always available only to the state, but in some cases also to the federal state and also to the local authorities. That is why we have such a problem reforming these types of taxes."
Trade tax is another type of tax that cannot be reformed at present due to political restrictions. "That is a holy cow," Neugebauer states, "if someone manages to reform it, he has almost deserved the Nobel Prize. There is an enormous reform backlog there." Also the 2004 introduced Alkopopsteuer, makes therefore little sense, because above all young people buy themselves the beverages now separately and mix them afterwards. "That's why there are always ways to avoid the whole thing."
Few people know about the possibilities of minimizing certain taxes or, ideally, getting them back. But there are options: "Especially in income tax, we have great opportunities to actually claim income-related expenses," says the tax expert, and lists the deductible trips from home to work. Further chances would be there regarding the special expenditures as well as the unusual loads.
The magic triangle of investment
The annual tax return can ideally lead to a pleasant refund by the tax office and possibly to new investments. Statistics show that Germans save about 10% of their income every year. The interest rate has been at a low for a long time and since Corona many people have been asking themselves: Where can I still invest money today? The secret lies in the so-called 'magic triangle of investment', as explained by Prof. Dr. André Betzer, Chair of Finance and Corporate Governance in Wuppertal. "The magic triangle in the context of financial investments relates the three main goals of investment: return, security and availability. The triangle of these goals is called magic because the goals compete with each other. Thus, an increase in the expected return means that my investment becomes riskier and I possibly cannot access the invested assets for a longer period of time". Before investing his assets, the investor must therefore ask himself which priority the individual goals have for him in relation to the invested assets. Afterwards the individual investment instruments should then be selected.
Crowd investing - a new form of investment?
Real estate is still considered a safe and profitable investment. "I agree with that," confirms Betzer. "In my opinion, this development has been intensified by the current pandemic, since it is precisely the experience of the lockdown that has led to an even greater desire for home ownership. We have seen how important it is to have a garden or a good workroom."
But not everyone has enough saved or available capital to invest in the real estate business. New forms of investment, such as crowd investing, are increasingly being talked about. "Crowdinvesting is an innovative investment possibility, with which investors can already take part with relatively small contributions - some platforms already start from 10 euro - in the economic success of enterprises", explain Betzer, who sees this investment possibility predominantly with young enterprises (Startups), real estate projects and the range of renewable energies and advises private investors rather against it. "Since the risk of Crowdinvesting is high, I would advise private investors only to the investment, if they are really convinced of the investment object, since also the total loss can threaten here. For a retirement savings plan this form of investment is not suitable in my eyes".
Shares - a long-term alternative source of income!
The question whether it is at all possible to name a savings option for the average consumer in these times can be answered positively by the financial expert under certain conditions. His credo in this respect is: "Never invest in just one share if you cannot do without the money", because share price developments such as those of Wirecard, which were even supported by the Federal Government, but also Bayer or Lufthansa can always be unpredictable. Individual wrong decisions, such as the Monsanto purchase by Bayer and economic developments, such as the corona influence on the aviation industry, could not be predicted with a glass ball.
"The theoretical models and empirical results of the financial industry clearly show that in order to achieve an optimal mix of return, liquidity and security, one should diversify broadly," explains Betzer. "Don't put all your eggs in one basket - that was the motto 50 years ago, that is the motto today and it will remain in the future". The best way to do this would actually be with an exchange-traded index fund on the MSCI World Index, which has had an average annual return of over 8% since 1975. "This means investing in over 1,600 companies worldwide at very low cost. You can save this as a one-time investment as well as a monthly pension savings plan", Betzer knows and comes back to the time factor of the magic triangle of investment. "The longer you can do without your money, the greater the proportion of your investment can be in shares. I am 43 years old. In my pension savings plans I have invested 100% in shares, because I will continue to work for at least 25 years. The vast majority of empirical scientific studies show that in various efficient stock markets (including Germany or the USA), you have historically not had to accept a nominal loss from an investment period of just over 10 years."
Saving without risk
Banks and savings banks have always been familiar to us. Many German citizens still consider the stock market to be a playground for speculators and do not want to wait long or take any risks with their financial possibilities, or to fall back on savings at short notice. In addition Betzer: "In the short and middle term to 5 years we all cannot avoid, if we depend on the money at certain times, to put our money for perhaps 0.3% to 0.5% on the overnight deposit account or even for perhaps 0.1-0.2 percentage points more than fixed deposits (2-3 years). Only here I can be sure that I will have the money at a certain point in time. There the circle of the magic triangle closes again. Capital preservation costs a lot of return. In the current situation, I am losing about 1 percent per year in real terms even with this type of investment due to inflation; I only receive my capital in nominal terms." Therefore the expert advises: "This should convince skeptics of the stock market or very risk-averse investors to invest a part of their money in the stock market for a longer period of time", and summarizes finally: "Actually it is quite simple. If I can do without an amount of money for a longer time, I should invest in a broad basket of shares. If I need the invested money in 3-5 years, then I have to switch to the call deposit account or fixed-term deposit. And that's what I do!"
Uwe Blass (Interview on 09.11.2020)
Prof. Dr. Claudia Neugebauer works at the Chair of Finance and Taxation of Prof. Dr. Kerstin Schneider.
Professor Dr. André Betzer has been head of the Chair of Finance and Corporate Governance of the Faculty of Economics at the University of Wuppertal since 2012.