Neo-Schumpeterian Tax Reform: The Case of Germany

Schumpeter took a great interest in actual fiscal policy, first, during ?9?8 and ?9?9 to rescue Austria’s economic position and currency in the aftermath of World War i. These reform proposals pertain to situations of extreme economic misery. For reforms of the fiscal system under normal economic conditions, we have to look at Schumpeter’s articles in Der deutsche Volkswirt in the years ?926 to ?930, which represent commentaries on German fiscal and economic policy in the Weimar Republic. As modern Germany’s economic and fiscal situation is characterized by high unemployment, high budgetary deficits, high public indebtedness, low economic growth, and a high level of impost (taxes and social security contributions), the present situation is not fundamentally different from the economic situation in the Weimar Republic. Screening these proposals, we find that Schumpeter was in favor of general taxes to avoid tax shifting, he pleaded for preferential tax treatment for saving and investments, he asked to keep taxes and contributions moderate, in particular the marginal rates, he suggested reducing the excess burden of taxation, he favored increasing the level of the tax-exempt subsistence income, and favored increasing the excise taxes on tobacco and alcohol. Concerning the social security system, we can only conjecture that Schumpeter would have recommended a funded social security system. A Schumpeterian escape from Germany’s current economic problems would be an impost system consisting of a flat tax supported by a social component. Under this proposal, all sources of domestic income are taxed at a proportional rate t. The social component comprises the subsistence level of a family and all inevitable expenses for making its living. The excess of the social component over the rate s of worldwide income is subsidized by public funds. Using a micro-simulation model for Germany, it is shown that such a system not only balances for t = 30% and s = 35%. It is also able to dispense with the corporation tax and the business tax. It reduces the excess burden of taxation considerably and causes dramatic reductions in the inequality of net incomes. A closer look at necessary reforms of the German tax and social security reform shows that they conform perfectly with Schumpeter’s ideas for Germany in the period 1926-1930, published in Der deutsche Volkswirt. Following Schumpeter, we end up with a flat tax and a social component for Germany to solve her current economic problems.