What you pay (to the state) when you go shopping in Germany?

Screen Shot 2014-08-15 at 08.37.21How is the German State financed? Of course, like any other state, foremost by taxes. There are two main points where the state takes his share: When people earn money (income tax) and when people spend money (consumption tax). The biggest of the latter is the value-added tax (also called purchase tax) which reaches a proportion of almost half (45,7 percent in 2012) of the total tax revenues in Germany.

Value-added tax rates in Germany are with 19 percent respectively 7 percent (reduced rate, mainly for food products) in the middle of tax rates in the European Union which varies from 15 to 27 and 6 to 12 (reduced rate). But of course the rates increased over the last decades (see Wikipedia-Screenshot above).

Interesting from an economic perspective: There are marginal cost of public funds. Thus, taxation is not only the question of who the money gets. When paying taxes society has to pay more than taxes, we also have to pay the so called excess burden (also known as distortionary cost or deadweight loss of taxation). What causes this? It’s because taxes increases the final prices, which typically leads to shrinking demand. The lost profit on the production side (the profit called producer surplus) plus the loss for users resulting for not using products and services (the benefit of using is called consumer surplus) is the so called excess burden.

Also an interesting question: What is the better tax system: direct or indirect taxation? – Read more on tutor2u.

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