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Tax Competition in Wilhelmine Germany and Its Implications for the European Union

Published online by Cambridge University Press:  13 June 2011

Mark Hallerberg
Mark Hallerberg
Affiliation:
Georgia Institute
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Abstract

The twenty-five German states from 1871 to 1914 present a useful data set for examining how increasing economic integration affects tax policy. After German unification the national government collapsed six currencies into one and liberalized preexisting restrictions on capital and labor mobility. In contrast, the empire did not directly interfere in the making of state tax policy; while states transferred certain indirect taxes to the central government, they maintained their own autonomous tax and political systems through World War I. This paper examines the extent to which tax competition forced the individual state tax systems to converge from 1871 to 1914. In spite of a diversity of political systems, tax competition did require states to harmonize their rates on mobile factors like capital and high income labor, but it did not affect tax rates on immobile factors. In states where the political system guaranteed agricultural dominance, taxes on land were reduced, while in states with more open systems, tax rates remained higher. One unexpected result is that tax rates on capital and income converged upward instead of downward. The most dominant state, Prussia, served as the lowest-common-denominator state, but pressure from the national government, especially to increase expenditures, forced all states to raise their tax rates. These results suggest possible ways for the European Union to avoid a forced downward convergence of member state tax rates on capital and mobile labor.

Type
Research Article
Information
World Politics , Volume 48 , Issue 3 , April 1996 , pp. 324 - 357
Copyright
Copyright © Trustees of Princeton University 1996

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References

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8 Margaret Levi assumes only that states maximize their revenue. The likelihood that states also want to attract the economic benefits from a given factor is not incompatible with the revenue-maximizing state. In both cases the government hopes to attract the movement of a given factor into its jurisdiction. Levi, , Of Rule and Revenue (Berkeley: University of California Press, 1988).Google Scholar

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11 Mecklenburg-Strelitz, Mecklenburg-Schwerin, and the three Hanseatic cities of Lübeck, Hamburg, and Bremen were not members of the Zollverein, while Luxembourg, which did not join the Reich, did participate in the customs union.

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14 Ibid., 20.

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16 Ibid., 772–74.

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18 In 1871 the railroads had 5.0 billion kilometers of personal transportation; in 1913 this figure had increased more than eightfold, to 41.4 billion. Hoffmann (fn. 15), 399–400.

19 In 1907, for example, just 40.5% of the two million residents of the capital city were native Berliners. The flight out of the countryside was just as dramatic; in the same year roughly one out of five born in the East Prussian provinces had moved on. Hoffmann (fn. 15), 180; Hohorst, GerdKocka, Jürgen, and Ritter, Gerhard A., Sozialgeschichtliches Arbeitsbuch: Materielen zur Statistik des Kaiserreichs, 1870–1914 (Social history workbook: Materials for statistics of the Kaiserreich period, 1870—1914) (Munich: Verlag C. H. Beck, 1975), 40, 19.Google Scholar

20 The year 1873 is the first for which state tax systems reflect changes from the time of the unification of Germany, such as the transfer of tariffs to the national government, and is used as the initial comparison date instead of 1871.

21 Political institutions filter preferences that already exist in the population; if a given state is overwhelmingly rural, it will favor agriculture even if it has an open political system.

22 Schanz, Georg, “Der Reichshaushalt und das Finanzwesen der Einzelstaaten,” Finanxarchiv 13, no. 1 (1896), 89 fn. 3.Google Scholar

23 A1% tax on sales value would represent a higher burden than a 1% tax on gross proceeds, because the land value always exceeded a given year's production; a 1% tax on gross proceeds would also be more onerous than a 1% tax on net proceeds, since a person paying a net tax could deduct input costs that a person paying a gross proceeds tax could not. It is therefore no surprise that Prussia's 4% tax on nex proceeds is higher than Bavaria's 1.67% tax on gross proceeds and Baden's .44% tax on the land's resale value.

24 Metzger, Ulrike and Weingarten, Joe, Einkommensteuer und Einkommensteuerverwaltung in Deutschland (Income tax and income tax administration in Germany) (Opladen: Westdeutscher Verlag, 1989), 48, 314.CrossRefGoogle Scholar Although the tax became law in 1874, these rates were not actually levied in Saxony until 1878. The Prussian rates are available in Joseph A. Hill, Quarterly Journal of Economics 6, reprinted in Bullock, Charles J., Selected Readings in Public Finance (Boston: Ginn and Company, 1906), 257.Google Scholar

25 The figures are available in the appendix.

26 For a more detailed discussion of the taxes used and the distribution of the tax burden, see Hallerberg, Mark, “Tax Competition, Political Institutions, and Democratization: The Development of State Tax Systems in Wilhelmine Germany” (Ph.D. diss., University of California, Los Angeles, 1995).Google Scholar

27 Steuerzahler, , Habt Acht!” Freisinnige Zeitung, September 9, 1907Google Scholar; trans, by the author.

28 Key additions to these taxes included a mandatory declaration of one's income for higher-income individuals, governmental audits, and statutory penalties for underreporting income.

29 “Übersicht der Ergebnisse der Einkommensteuer-Veranlagung fur das Steuerjahr 1913,” Nr. 31, Haus der Abgeordneten 22. Legislaturperiode, II. Session 1914, Rep. 77, Tit. 43, No. 89, Geheimes Staatsarchiv Preufiischer Kulturbesitz (hereafter cited as GStA), 23–24. Prussia's income minimum, which was high by German standards, was low compared with England's minimum of about 3,200 marks. The Social Democrats demanded in pamphlets that the German states adopt the English minimum; see, for example, Wurm, Emanuel, Die Finanzgeschichte des deutschen Reiches (The financial history of the German empire) (Hamburg: Erdmann Dubber in Hamburg, 1910), 69.Google Scholar

30 Schremmer, D. E., “Taxation and Public Finance: Britain, France, and Germany,” Cambridge Economic History of Europe (Cambridge: Cambridge University Press, 1989)Google Scholar, 8:482.

31 There are several reasons why the data can be suspect, and the decrease in land tax rates may have been larger than what is estimated here. First, it is impossible to know with any certainty if a given state uniformly carried out land assessments. The timing of assessments also mattered—a state that regularly revised its records would have had a more burdensome tax than a state like Prussia, which did not commission a new land-tax assessment during the entire period, and the author could not locate assessment dates for all of the states. Figure 4 may therefore underestimate the decrease in real (as opposed to statutory) land tax rates from 1873 to 1914 if most of the states did not revise an assessment that they generally conducted between 1860 and 1875.

The figures in the graph indicate only the percentage of net value of proceeds; sales value rates are converted into net proceeds percentages by multiplying them by 77, which is their presumed proceeds value. Many supporters of agriculture within the Center Party and the two conservative parties asserted that the real multiplier was 25, and they successfully passed this figure into the assessment of the property tax in 1909. Prussian Finance Minister von Rheinbaben asserted that the true multiplier was 77, which was based on his ministry's estimates and are found in “Die Ergebnisse der Veranlagung des land- und forstwirtschaftlich benuzten Grundbesitzes zur Erganzungssteuer fur die Veranlagungsperiode 1902/04.” Sent from General Tax Director High Financial Councillor Wallach to Finance Minister von Rheinbaben. 12.2.06 Rep. 151 II Nr. 2013, GStA (fn. 29). If the true multiplier were closer to the one that the agricultural interests favored, then the conclusion that land tax rates both decreased and diverged would be stronger.

Finally, some states that passed a general property tax continued to levy the land tax. In most cases the land tax became a more or less dead appendage, since revisions of assessments did not occur after passage of the property tax. An exception was Saxony, and the Saxon land tax is included in the figures.

32 These differences are fairly small but not trivial. The tax assessed the total property that one owned and not that property's return (which the income tax was designed to address). Those who were liable to pay the tax usually owned many thousands of marks in property, and a change of .055% in the rate did affect one's tax bill. A person who owned a 50,000 mark estate paid 25 marks in tax in Saxony but 55 marks in Baden.

33 Figure computed from Peter-Christian Witt, Die Finanzpolitik des Deutschen Reich von 1903 bis 1913 (The financial politics of the German empire from 1903 through 1913) (Lubeck and Hamburg: Matthiesen Verlag, 1970), 126 fn. 455.

34 For instance, in 1914 one multiplied the production assessment by 25, then levied a tax of .055%; this meant that the owner of a piece of land that produced 10,000 marks of grain in 1873 would pay 400 marks of tax in 1873 but only 137.5 marks in 1914.

35 See Warren, Donald, The Red Kingdom of Saxony: Lobbying Grounds for Gustav Stresemann, 1901–1909 (The Hague: Martinus Nijhoff, 1964), 75–76CrossRefGoogle Scholar; Bakes, Eugen, “Die deutschen Vermogensteuern,” Finanzarchiv 32, no. 2 (1915)Google Scholar, provides greater detail on the assessment methods the smaller states used, although some of his figures, such as the tax rate for Hesse, are clearly inaccurate.

36 This tax cut, while appealing to the pocketbooks of the largest landowners, potentially also meant a loss of political power, since tax payments determined one's class in the three-class voting system. The Landtag assured that landowners did not lose any electoral strength when it passed legislation that stipulated that, for voting purposes only, landowners were treated as though they still paid the state levy. For a social democratic view of this practice, see Leinert, Robert, Die PreuJSischen Landtagswahlen (The Prussian parliamentary elections) (Berlin: Buchhandlung Vorwarts Paul Singer, 1913), 17.Google Scholar

37 Witt (fn. 33), 22.

38 Of the three parts of the welfare state that Bismarck introduced, that is, health insurance, accident insurance, and old-age pensions, the state contributed only to old-age pensions, and then only 50 marks per year. Kitchen, Martin, The Political Economy of Germany, 1815–1914 (Montreal: McGillQueen's University Press, 1978), 177CrossRefGoogle Scholar.

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41 See especially “Ausgleichung der einzelstaatlichen Einkommensteuergesetze. 1918,” Rep. 77 Tit. 43 Nr. 102, GstA (fn. 29); and “Steuerflucht. Abwanderung nach dem Ausland. Verhandlungen iiber die Einfuhrung eines Gesetzes gegen die Steuerflucht. 1918,” Rep. 151 II Nr. 2009, GstA (fn. 29).

42 I thank Susanne Lohmann for emphasizing this point to me.

43 As mentioned before, Article 70 of the Reich Constitution stipulated that the national government could not run an ordinary budget deficit. If its revenues did not cover expenditures, the states were required to make up the difference in proportion to their populations.

44 A succinct discussion of the politics behind the passage of the tariffs is found in Kitchen (fn. 38), 152–53.

45 Prochnow, Peter-Michael, “Staat im Wachstum: Versuch einer finanzwirtschaftlichen Analyse der preuftischen Haushaltsrechnungen, 1871–1913” (State in growth: Attempt at a financial-economic analysis of the Prussian budget receipts, 1871–1913) (Ph.D. diss., University of Munster, 1977), 58–59Google Scholar.

46 In 1912 the level of net transfers to the Reich had increased even more, to 51.9 million marks. Figures computed from Gerloff, Wilhelm, Die Finanz und Zollpolitik des deutschen Retches (The politics of finance and tariffs in the German empire) (Jena: Verlag von Gustav Fischer, 1913), 522–23Google Scholar.

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49 Although railroads became the principal source of income, the state had other businesses as well, including interests in porcelain and coal production, and it collected revenue from its considerable holdings of land. The figure is from Schremmer (fn. 30), 419.

50 For a brief discussion of the plight of the small states, see Kruedener, Jürgen von, “The Franckenstein Paradox in the Intergovernmental Fiscal Relations of Imperial Germany,” in Witt, Peter-Christian, Wealth and Taxation in Central Europe (New York: Berg, 1987), 111–24Google Scholar.

51 See especially Geschenkron, Alexander, Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge: Harvard University Press, 1962)Google Scholar.

52 Sinn (fn. 10), 502.

53 Eichengreen, , Should the Maastricht Treaty Be Saved? Princeton Studies in International Finance, no. 74 (December 1992), 32–37Google Scholar; and Krugman, , “Lessons of Massachusetts for EMU,” in Torres, Francisco and Giavazzi, Francesco, eds., Adjustment and Growth in the European Monetary Union (Cambridge: Cambridge University Press, 1993), 241–61CrossRefGoogle Scholar.

54 Sinn (fn. 1), 4.

55 Rädler, Albert, “Where Does Tax Harmonization Stand Today?” EC Tax Review 4 (1993), 198–99Google Scholar.