Tax competition in Wilhelmine Germany and its implications for the European Union

World Politics

Volumn 48, Issue 3, 1996, Pages 324-357

  Hallerberg, Mark ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

ECONOMIC INTEGRATION; EUROPEAN UNION IMPLICATION; HISTORICAL STUDIES; POLICY IMPLICATION; STATE TAX; TAX COMPETITION; TWENTIETH CENTURY;

GERMANY;

EID: 0029751571     PISSN: 00438871     EISSN: None     Source Type: Journal    
DOI: 10.1353/wp.1996.0010     Document Type: Article

References (68)

1. Sinn, "The Case for European Harmonization," in Georg Winkler, ed., Tax Harmonization and Financial Liberalization in Europe (New York: St. Martin's Press, 1992), 5, 7. An overview of problems resulting from economic integration is found in Horst Siebert, "Perspektiven zur Vollendung des europäischen Binnenmarkts," Kyklos 42, no. 2 (1989).
2. Sinn, "The Case for European Harmonization," in Georg Winkler, ed., Tax Harmonization and Financial Liberalization in Europe (New York: St. Martin's Press, 1992), 5, 7. An overview of problems resulting from economic integration is found in Horst Siebert, "Perspektiven zur Vollendung des europäischen Binnenmarkts," Kyklos 42, no. 2 (1989).
3. Alberto Giovannini, "National Tax Systems versus the European Capital Market," Economic Policy 9 (October 1989).
4. Steinmo, Taxation and Democracy (New Haven: Yale University Press, 1993); Lee and McKenzie, "The International Political Economy of Declining Tax Rates," National Tax Journal 17 (March 1989), 79-84.
5. Steinmo, Taxation and Democracy (New Haven: Yale University Press, 1993); Lee and McKenzie, "The International Political Economy of Declining Tax Rates," National Tax Journal 17 (March 1989), 79-84.
6. Several authors considered the parallels between the Zollverein and the creation of the European Community in the late 1950s and early 1960s, including Wolfram Fischer, "Der Deutsche Zollverein, die Europäische Wirtschaftsgemeinschaft und die Freihandelszone," Europa-Archiv 5 (1961); and the Introduction to W. O. Henderson, The Zollverein (London: Frank Cass, 1959). A more recent discussion can be found in Rolf H. Dumke, "Tariffs and Market Structure: The German Zollverein as a Model for Economic Integration," in W. R. Lee, ed., German Industry and German Industrialisation (London and New York: Routledge, 1991).
7. Several authors considered the parallels between the Zollverein and the creation of the European Community in the late 1950s and early 1960s, including Wolfram Fischer, "Der Deutsche Zollverein, die Europäische Wirtschaftsgemeinschaft und die Freihandelszone," Europa-Archiv 5 (1961); and the Introduction to W. O. Henderson, The Zollverein (London: Frank Cass, 1959). A more recent discussion can be found in Rolf H. Dumke, "Tariffs and Market Structure: The German Zollverein as a Model for Economic Integration," in W. R. Lee, ed., German Industry and German Industrialisation (London and New York: Routledge, 1991).
8. Several authors considered the parallels between the Zollverein and the creation of the European Community in the late 1950s and early 1960s, including Wolfram Fischer, "Der Deutsche Zollverein, die Europäische Wirtschaftsgemeinschaft und die Freihandelszone," Europa-Archiv 5 (1961); and the Introduction to W. O. Henderson, The Zollverein (London: Frank Cass, 1959). A more recent discussion can be found in Rolf H. Dumke, "Tariffs and Market Structure: The German Zollverein as a Model for Economic Integration," in W. R. Lee, ed., German Industry and German Industrialisation (London and New York: Routledge, 1991).
9. Examples include Arend Lijphart, ed., Presidential vs. Parliamentary Systems (Oxford: Oxford University Press, 1992); and Rein Taagepara and Matthew Soberg Schugart, Seats and Votes (New Haven: Yale University Press, 1989).
10. Examples include Arend Lijphart, ed., Presidential vs. Parliamentary Systems (Oxford: Oxford University Press, 1992); and Rein Taagepara and Matthew Soberg Schugart, Seats and Votes (New Haven: Yale University Press, 1989).
11. Tiebout, "A Pure Theory of Local Expenditures, " Journal of Political Economy 64 (October 1956), 416-24. A more recent treatment is Jacob A. Frenkel, Assaf Razin, and Efraim Sadka, International Taxation in an Integrated World (Cambridge: MIT Press, 1991). For an introductory summary of the is-sues facing the European Union, see Commission of the European Communities, Report of the Committee of Independent Experts on Company Taxation (Luxembourg: Office for Official Publications of the European Communities, 1992).
12. Tiebout, "A Pure Theory of Local Expenditures, " Journal of Political Economy 64 (October 1956), 416-24. A more recent treatment is Jacob A. Frenkel, Assaf Razin, and Efraim Sadka, International Taxation in an Integrated World (Cambridge: MIT Press, 1991). For an introductory summary of the is-sues facing the European Union, see Commission of the European Communities, Report of the Committee of Independent Experts on Company Taxation (Luxembourg: Office for Official Publications of the European Communities, 1992).
13. Tiebout, "A Pure Theory of Local Expenditures, " Journal of Political Economy 64 (October 1956), 416-24. A more recent treatment is Jacob A. Frenkel, Assaf Razin, and Efraim Sadka, International Taxation in an Integrated World (Cambridge: MIT Press, 1991). For an introductory summary of the is-sues facing the European Union, see Commission of the European Communities, Report of the Committee of Independent Experts on Company Taxation (Luxembourg: Office for Official Publications of the European Communities, 1992).
14. This method is known as the source principle. Most industrialized states assess capital according to the residence principle, which taxes all income earned by persons residing in a given state, regardless of where the income is earned. States prefer this latter method because it should allow them to maintain different marginal tax rates; citizens pay the same tax rate regardless of where they invest. In order for the residence principle to operate in this manner, however, the state must have complete information on an individual's foreign holdings. If it is possible to hide income earned in certain states, then tax rates do affect investment decisions. A good summary is found in George Kopits, "Overview," in Kopits, ed., Tax Rate Harmonization in the European Community, International Monetary Fund Occasional Paper no. 94 (July 1992), 1-21. For a more technical discussion, see Frenkel, Razin, and Sadka (fn. 6), 21-42.
15. 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).
16. Giovannini (fn. 2), 368, also makes this point.
17. Hans-Werner Sinn compares the situation facing the European Union to a perverse insurance market. "A Europe with competing tax systems and unrestricted migration would be like an insurance market where the customers can select their company and pay the premium after they know whether or not a loss has occurred." Sinn, "Tax Harmonization and Tax Competition in Europe," European Economic Review 34 (1990), 502.
18. 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.
19. Carl-Ludwig Holtfrerich, "The Monetary Unification Process in Nineteenth-Century Germany: Relevance and Lessons for Europe Today," in Marcello De Cecco and Alberto Giovannini, eds., A European Central Bank? Perspectives on Monetary Unification after Ten Years of the EMS (Cambridge: Cambridge University Press, 1989), 226.
20. Knut Borchardt, "Währung und Wirtschaft," in Deutsche Bundesbank, Währung und Wirtschaft in Deutschland, 1876-1975 (Currency and economy in Germany, 1876-1975) (Frankfurt am Main: Fritz Knapp, 1976), 3-4.
21. Ibid., 20.
22. Agriculture under this definition includes forestry and fishery, while industry also covers handicrafts. Other sectors that Hoffmann considers are mining, transportation, trade, household services, other services including the military, and nonagricultural residences, each of which accounted for less than 10% of net national product in 1910-13. An interesting finding is that spending on the military dropped from 10.4% in 1875-79 (i.e., four years after the end of war with France) to 9.0% in 1910-13. It appears that military spending did not keep up with economic growth. Walther Hoffmann, Das Wachstum der deutschen Wirtschaft seit der Mitte des 19. Jahrhunderts (The growth of the German economy since the middle of the nineteenth century) (Berlin: Springer-Verlag, 1965), 33.
23. Ibid., 772-74.
24. Quote in Hubert Kiesewetter, "Economic Preconditions for Germany's Nation-Building in the Nineteenth Century," in Hagen Schulze, ed., Nation-Building in Central Europe (Lamington Spa: Berg, 1987), 89. See also Richard J. Bazillion, Modernizing Germany: Karl Biedermann's Career in the Kingdom of Saxony, 1935-1901 (New York: Peter Lang, 1990), 362.
25. Quote in Hubert Kiesewetter, "Economic Preconditions for Germany's Nation-Building in the Nineteenth Century," in Hagen Schulze, ed., Nation-Building in Central Europe (Lamington Spa: Berg, 1987), 89. See also Richard J. Bazillion, Modernizing Germany: Karl Biedermann's Career in the Kingdom of Saxony, 1935-1901 (New York: Peter Lang, 1990), 362.
26. 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.
27. 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; Gerd Hohorst, Jürgen Kocka, and Gerhard A. Ritter, 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.
28. 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.
29. Political institutions filter preferences that already exist in the population; if a given state is over-whelmingly rural, it will favor agriculture even if it has an open political system.
30. Georg Schanz, "Der Reichshaushalt und das Finanzwesen der Einzelstaaten," Finanzarchiv 13, no. 1 (1896), 89 fn. 3.
31. A 1% 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.
32. Ulrike Metzger and Joe Weingarten, Einkommensteuer und Einkommensteuerverwaltung in Deutschland (Income tax and income tax administration in Germany) (Opladen: Westdeutscher Verlag, 1989), 48, 314. 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 Charles J. Bullock, Selected Readings in Public Finance (Boston: Ginn and Company, 1906), 257.
33. Ulrike Metzger and Joe Weingarten, Einkommensteuer und Einkommensteuerverwaltung in Deutschland (Income tax and income tax administration in Germany) (Opladen: Westdeutscher Verlag, 1989), 48, 314. 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 Charles J. Bullock, Selected Readings in Public Finance (Boston: Ginn and Company, 1906), 257.
34. Ulrike Metzger and Joe Weingarten, Einkommensteuer und Einkommensteuerverwaltung in Deutschland (Income tax and income tax administration in Germany) (Opladen: Westdeutscher Verlag, 1989), 48, 314. 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 Charles J. Bullock, Selected Readings in Public Finance (Boston: Ginn and Company, 1906), 257.
35. The figures are available in the appendix.
36. For a more detailed discussion of the taxes used and the distribution of the tax burden, see Mark Hallerberg, "Tax Competition, Political Institutions, and Democratization: The Development of State Tax Systems in Wilhelmine Germany" (Ph.D. diss., University of California, Los Angeles, 1995).
37. Steuerzahler, Habt Acht!" Freisinnige Zeitung, September 9,1907; trans. by the author.
38. 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.
39. "Übersicht der Ergebnisse der Einkommensteuer-Veranlagung für das Steuerjahr 1913," Nr. 31, Haus der Abgeordneten 22. Legislaturperiode, II. Session 1914, Rep. 77, Tit. 43, No. 89, Geheimes Staatsarchiv Preußischer 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, Emanuel Wurm, Die Finanzgeschichte des deutschen Reiches (The financial history of the German empire) (Hamburg: Erdmann Dubber in Hamburg, 1910), 69.
40. "Übersicht der Ergebnisse der Einkommensteuer-Veranlagung für das Steuerjahr 1913," Nr. 31, Haus der Abgeordneten 22. Legislaturperiode, II. Session 1914, Rep. 77, Tit. 43, No. 89, Geheimes Staatsarchiv Preußischer 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, Emanuel Wurm, Die Finanzgeschichte des deutschen Reiches (The financial history of the German empire) (Hamburg: Erdmann Dubber in Hamburg, 1910), 69.
41. D. E. Schremmer, "Taxation and Public Finance: Britain, France, and Germany," Cambridge Economic History of Europe (Cambridge: Cambridge University Press, 1989), 8:482.
42. 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 Ergänzungssteuer für 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.
43. 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.
44. Figure computed from Peter-Christian Wirt, Die Finanzpolitik des Deutschen Reichs von 1903 bis 1913 (The financial politics of the German empire from 1903 through 1913) (Lübeck and Hamburg: Matthiesen Verlag, 1970), 126 fn. 455.
45. 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.
46. See Donald Warren, The Red Kingdom of Saxony: Lobbying Grounds for Gustav Stresemann, 1901-1909 (The Hague: Martinus Nijhoff, 1964), 75-76; Eugen Baltes, "Die deutschen Vermögensteuern," Finanzarchiv 32, no. 2 (1915), 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.
47. See Donald Warren, The Red Kingdom of Saxony: Lobbying Grounds for Gustav Stresemann, 1901-1909 (The Hague: Martinus Nijhoff, 1964), 75-76; Eugen Baltes, "Die deutschen Vermögensteuern," Finanzarchiv 32, no. 2 (1915), 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.
48. 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 Robert Leinert, Die Preußischen Landtagswahlen (The Prussian parliamentary elections) (Berlin: Buchhandlung Vorwärts Paul Singer, 1913), 17.
49. Witt (fn. 33), 22.
50. 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. Martin Kitchen, The Political Economy of Germany, 1815-1914 (Montreal: McGill-Queen's University Press, 1978), 177.
51. For a persuasive discussion of how World War I changed this attitude, see Alan T. Peacock and J. Wiseman, The Growth of Public Expenditure in the United Kingdom (Princeton, N.J.: National Bureau of Economic Research, 1961).
52. Seligman, The Income Tax (New York: MacMillian Company, 1914), 331. He also made a similar statement for Italy: "Obviously an income tax running up to twenty per cent, to which all manner of other kinds of local taxes are to be added, would indeed be unendurable if enforced to the hilt" (p. 353).
53. See especially "Ausgleichung der einzelstaatlichen Einkommensteuergesetze. 1918," Rep. 77 Tit. 43 Nr. 102, GstA (fn. 29); and "Steuerflucht. Abwanderung nach dem Ausland. Verhandlungen über die Einführung eines Gesetzes gegen die Steuerflucht. 1918," Rep. 151 II Nr. 2009, GstA (fn. 29).
54. See especially "Ausgleichung der einzelstaatlichen Einkommensteuergesetze. 1918," Rep. 77 Tit. 43 Nr. 102, GstA (fn. 29); and "Steuerflucht. Abwanderung nach dem Ausland. Verhandlungen über die Einführung eines Gesetzes gegen die Steuerflucht. 1918," Rep. 151 II Nr. 2009, GstA (fn. 29).
55. I thank Susanne Lohmann for emphasizing this point to me.
56. 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.
57. A succinct discussion of the politics behind the passage of the tariffs is found in Kitchen (fn. 38), 152-53.
58. Peter-Michael Prochnow, "Staat im Wachstum: Versuch einer finanzwirtschaftlichen Analyse der preußischen Haushaltsrechnungen, 1871-1913" (State in growth: Attempt at a financial-economic analysis of the Prussian budget receipts, 1871-1913) (Ph.D. diss., University of Münster, 1977), 58-59.
59. In 1912 the level of net transfers to the Reich had increased even more, to 51.9 million marks. Figures computed from Wilhelm Gerloff, Die Finanz und Zollpolitik des deutschen Reiches (The politics of finance and tariffs in the German empire) (Jena: Verlag von Gustav Fischer, 1913), 522-23.
60. Ibid., 377.
61. Rainer Fremdling, "Freight Rates and State Budget: The Role of the National Prussian Railways, 1880-1913," Journal of European Economic History 9 (1980), 34. Income tax figures are from Metzger and Weingarten (fn. 24), 305. Wilhelm Gerloff states that for the budget year 1893-94 Prussia grossed 1,522 million marks and spent 853 million, which implies a surplus of 669 million, but these figures probably exclude the repayment of railroad debt. Gerloff (fn. 46), 256.
62. 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.
63. For a brief discussion of the plight of the small states, see Jürgen von Kruedener, "The Franckenstein Paradox in the Intergovernmental Fiscal Relations of Imperial Germany," in Peter-Christian Witt, Wealth and Taxation in Central Europe (New York: Berg, 1987), 111-24.
64. See especially Alexander Geschenkron, Economic Backwardness in Historical Perspective: A Book of Essays (Cambridge: Harvard University Press, 1962).
65. Sinn (fn. 10), 502.
66. Eichengreen, Should the Maastricht Treaty Be Saved? Princeton Studies in International Finance, no. 74 (December 1992), 32-37; and Krugman, "Lessons of Massachusetts for EMU," in Francisco Torres and Francesco Giavazzi, eds., Adjustment and Growth in the European Monetary Union (Cambridge: Cambridge University Press, 1993), 241-61.
67. Eichengreen, Should the Maastricht Treaty Be Saved? Princeton Studies in International Finance, no. 74 (December 1992), 32-37; and Krugman, "Lessons of Massachusetts for EMU," in Francisco Torres and Francesco Giavazzi, eds., Adjustment and Growth in the European Monetary Union (Cambridge: Cambridge University Press, 1993), 241-61.
68. Sinn (fn. 1), 4.