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a blog from young economists at Nova SBE

A bad example to collect money

The solidarity surcharge in Germany – Abuse of a moral concept


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.






Author: Christiane Seidl

Author: studentnovasbe

Master student in Nova Sbe

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