Nova workboard

a blog from young economists at Nova SBE


A bad example to collect money

The solidarity surcharge in Germany – Abuse of a moral concept

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After the reunification of Germany, Chancellor Kohl was in need of raising funds to build up the new states: The solution was an increase in the payroll, income and corporate tax of 7,5% in 1991, which was meant to be an one-time incidence.
However, this solidarity surcharge is still visible on every German taxpayer’s wage slip, month after month, year after year – even if the proportion was lowered to 5,5% in 1995, this voluntary transfer applies to all income classes.
Furthermore, a solidarity pact was implemented on communes in West-Germany in 1993, that had the same purpose: Aufschwung Ost (reconstruction of the East).

From an economic perspective, both policies performed poorly in channeling resources, or increasing equity within the country:

  • The solidarity surcharge is paid by West- and East-German tax-payers alike, so individuals face only losses.

  • The money flows directly into the government’s moneybox; there is also no requirement, and therefore no guarantee, that it is used on investments in the Eastern part.

  • The money raised since 1991 amounts to €187 milliards, whereas the Federal state did spend over €1 billion1 on the renovation of the East zone, and it is far from being completed. In this perspective solidarity contribution is a minor source of financing.

  • Forced redistribution of money from communes of the old states, regardless of their capability to pay the annual share, sometimes even financed by credits.

Not only are the citizens of the donor countries shaking their heads when confronted with the recipient countries’ money waste – Airport Berlin-Brandenburg is the most recent example – but also more and more communes and cities are questioning the very nature of the pact: a geographical transfer, totally disentangled from the real needs of communes and cities: Is this how solidarity should be? That West-German main cities are operating over-aged train stations, while every small city in East-Germany has a modern one, built of light steel and glass?

 In my point of view, the fact, that the total amount of the surcharge is relative small, might be reason enough to contemplate its usefulness – to abolish the tax with the fancy name implies that existing moral hazard to waste money in East-German states, and the regional burden on West-Germany on the other hand will decline. The efficiency loss due to extra taxation may shrink as well.

However, solidarity itself may be valuable to society, such that the transfers should be maintained – in that case they should be adjusted to match the criteria, and, further, they should take into account real differences between all regions of the country, and not rely any longer on the East-West map drawn by politicians in the early 1990s.

 

 

Sources: http://www.tagesschau.de/inland/solidarpaktsolidaritaetszuschlag100.html

             1 http://www.tagesschau.de/multimedia/politikimradio/audio72336.html

 

Author: Christiane Seidl

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Public Economics in countries with failed governments

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We often speak of Public Economics in the context of Western countries, where we generally have what we can call successful governments. Now the question is: in the presence of failed governments is there anything useful we can learn in terms of Public Economics?

In this blog entry I try make the point that there is: as governments fail, other civil society agents are pressured to step in to tackle the issues left to meet by these failed states. My point is that maybe the right Public Sector does not lie at an extreme, but halfway between a large and relatively efficient government like we see in the West and a strong mobilized civil society we may see when states fail.

A REAL STORY

In April 2010 I went to live for a couple of weeks to Bulawayo, in Zimbabwe, a country which ranks 5th in the index of the most failed states of 2012. While here in Portugal  the government takes in its own hands areas such as Education, Public Order and Safety, and Social Protection, in Zimbabwe due the absence of government people had to took those public responsibilities into their own hands:

  • Health-wise, 20% of the population is contaminated by HIV. Because the health system is so deteriorated, the way villages found to deal with this issue was by having village health workers that are selected by the elders in each village and that use bicycles to reach the country’s most remote areas to do prevention and provide anti-retroviral drugs.
  • As for Public Order and Safety, political violence during election times often threatens stability and tribal violence is also common. Once again it was up to civil society step in: while there I met innumerous projects of Zimbabwean youth that took pacification into their own hands, using the Arts as a mean to bridge tribal segregation.
  • Finally, in terms of Social Protection, to a good extent the Church (in the picture above) plays part of the usual role of the state in assisting people in more vulnerable situations.

Going back to Portugal, I realized that Public Economics is not just about the government, but also about public agents like village health workers, active youth and religious authorities that take into their hands public responsibilities beyond government’s reach. This is not an argument against the welfare state, which I believe is a crucial foundation of our society, instead, this is an argument in favour of using the potential of our civil society to help sustain it and make it more effective over the long-run.

REFERENCES:

  1. The 2012 Failed States Index of Foreign Policy Magazine and Fund for Peace (http://www.foreignpolicy.com/failed_states_index_2012_interactive)
  2. About Village Health Workers in Zimbabwe (http://www.unicef.org/infobycountry/zimbabwe_66508.html)

Written by João Rafael Brites in February 27, 2013