Taxation and expenditure vary from one country to another because countries have different tax legislations, economies, and forms of government. Since the government has the responsibility of providing its citizens with essential goods and services, different countries have devised various means of providing these goods and services based on the form of government, tax structure, and economic and political ideologies.
Taxation and expenditure in countries that have federal form of government is different from that of countries that have state form of government. Countries like the United States and Germany have federal form of government where taxation and expenditure occur at federal, state, and local governments.
Shah argues that, government functions affect economic aspects of its citizens through taxation, expenditure, legislations of business, borrowing, and foreign policy, which influence both public and private sectors (5). Although federal governments may have similar patterns of governance, they have different ways of taxation and expenditure due to disparity in size of public and private sector.
Given that, the government has a primary responsibility of providing critical goods and services to its citizens, different governments have delegated their responsibility to the private sector, thus causing disparity in size of public expenditure from one country to another. Thus, this research paper compares taxation and expenditure of Germany and the United States.
Germany is one of the countries in Europe that has the largest economy because it ranks fifth in the world in terms of Gross Domestic Product (GDP). In Europe, Germany has been a leading driver of economy because it depends on exports that make it the second largest exporter in the world after the United States. Thus, it means that the economy of Germany mainly relies on international trade.
However, since Germany does not have enough energy, it imports approximately two-thirds from leading trading partners across Europe. In economic sectors, service industry gives about 70% of GDP and manufacturing industry contributes about 29% of GDP, while agriculture contributes the least, about 1% of GDP. Therefore, government taxes mainly come from the service industry that contributes over a third of GDP.
Moreover, Germany has federal form of government in that it collects taxes at various levels of government such as federal, state, and municipality. Sources of taxes in Germany are income tax, corporation tax, trade tax, value-added-tax, capital tax, and real property tax amongst other sources.
In Germany, rate of income tax ranges from 0% to 45%, which means that rate of taxation increases with the increase in taxable income. Currently, corporation tax rate stands at 15%, which government charges on cooperatives, partnerships, companies, foundations and associations. Individuals operating businesses in Germany are subject to income tax as well as trade tax. States and municipalities have the mandate of charging trade tax at a rate of 14% on profit that businesses make.
Moreover, Germany imposes value-added-tax rate of 19% on most goods and services except few that have tax exemption. Hence, federal, state, and municipal governments collaborate in the collection of taxes so that they can proportionately share them using a formula that German constitution prescribes to promote equitable distribution of revenue and resources.
Economically, the United States ranks first across the world with a GDP of about $15 trillion, which forms a significant part of world’s GDP. In North America, the United States is leading in trade as it dominates Canada and Mexico in international trade. The United States does not only have the highest GPD across the world, but also the highest purchasing power parity that makes it a leader in international trade.
Due to globalization of world markets, the United States dominates a considerable part of international trade, which makes it a pacesetter in global economies. Service and manufacturing industries are two principal sectors of the economy that boost economic growth and development since they contribute a significant amount to GDP.
The United States has maintained relatively stable growth rate of GDP for decades as it currently stands at about 4%, and is promising to increase despite global crisis of economy and globalization factors of economy. Moreover, the United States dominates financial markets, labor markets and trading markets that have made it invest billions of dollars in foreign investments.
Since the United States has a federal form of government, taxation occurs at federal, state, and local levels of government. Each level of government imposes tax differently basing on stipulations in the constitution that define and restrict taxation. Normally, the United States derives it taxes from income of individuals, corporations, companies, estates and other entities that generate income.
At state levels, income tax rates range from 1% to 16% depending on taxable income and region. In the United States, state and local authorities impose their tax rates in addition to federal taxes, which means state and local taxation is independent of federal taxation. Thus, although states and local authorities may have a basis of their taxation on federal law, there is a variation in the imposition of taxes across different states in the United States.
Economies of the United States and Germany are growing at different rates since each has different lucrative sectors that contribute to GDP. From 2003 to 2010, GDP of Germany has been increasing gradually from $2339 billion to $3044 billion, which is about growth rate of 3% per year. Comparatively, the United States GDP has also been increasing from $11089 billion in 2003 to $14447 billion in 2010, which is approximately a growth rate of 3%.
Thus, it means that economic growth rates of Germany and the United States in terms of GDP are almost the same although there are other parameters that can differentiate them. Given that growth rates of GDP are almost similar, it implies that taxation rates of Germany and Unite States should be proportional to GDP. Comparative, analysis of GDP of Germany and the United States shows that they have similar growth of GDP in spite of their differences in lucrative sectors of the economy.
Taxation in the United States and Germany seem to have different patterns due to differences in federal form of governments. Germany has three levels of governments, federal, state and municipality, which are not autonomous as they rely on central government in terms of policies and legislations that relate to taxation. On the other hand, the United States has three levels of government viz. federal, state, and local and they are independent and autonomous as they have their own legislations of taxation.
Therefore, differences in legislations of taxation are responsible for high rates of value-added-tax in Germany relative to the United States. In Germany, value-added-tax forms about 10% of GDP, while in the United States, value-added-tax forms approximately 5% of GDP, which implies that tax that Germany imposes on goods and services doubles that of the United States.
According to Holtz-Eakin, low rate of tax gives the United States’ goods and services competitive advantage in internationally markets (7). Hence, goods and services of the United States are exceptionally competitive due to low rate of tax imposed on them relative to those of Germany.
Germany and the United States have different rates of income tax. While income tax rates of Germany vary from 0% to 45%, the United States income tax range from 10% to 35% depending on the amount of taxable income. Both countries consider marriage status of an individual in imposing income tax to individuals.
Comparative analysis shows that Germany imposes a higher amount of income tax than the United States. For instance, while a single person without children is subject to 39% rate of income tax in Germany, in the United States, the same individual is subject to 23% rate of income tax. Thus, it indicates that Germany imposes an income tax rate on its citizens that doubles that of the United States.
However, Leetmaa, Rennie, and Thiry assert that, households in the United States are net borrowers because they have -3.7% of their disposable income, while Germany households have 8.2% of their disposable income (7). Differences in disposable income are due to dissimilar saving rates between households in Germany and the United States.
Rates of corporate tax vary between Germany and the United States. Usually, corporate tax contributes significantly to the tax system of a country, particularly to those countries that rely on industrial economy. Comparative analysis shows that, corporate tax in Germany is about 1% of GDP, while in the United States it is about 1.8% of GDP. Disparity in the corporate tax is mainly due to the extent of industrialization of two countries.
Moreover, rate of corporate tax is also another factor that may enhance disparity in the corporate tax that different countries charge on corporate income. Holtz-Eakin states that, corporate tax rates of the United States are higher than that of G7 countries because of its corporate tax structure, and reliance on industrial economy (13). Thus, differences in the tax structure and nature of the economy are two factors that cause disparity in corporate income.
Tax expenditure differs in Germany and the United States due to differences in legislations and economic development. In Germany, federation, state and municipal governments impose taxes on various sources of income such as individual income, corporate income and trade income basing on different legislations. When different levels of government have collected their revenue, central government distributes them according to formula stipulated in the constitution.
In contrast, different levels of government in the United States have autonomy and independence in taxation and expenditure. According to Organization for Economic Co-operation and Development (OECD), income tax expenditure of Germany is 0.29% of GDP, while that of the United States is 6% (93,138). Hence, there is significant disparity in income tax expenditure between the two countries.
Germany and the United States are both developed countries with almost the same growth rate of GDP and federal form of government, but they have different modes of taxation and expenditure. Differences in modes of taxation and expenditure are due to legislations and nature of the economy. While Germany relies on service industry in its economy, the United States relies on the manufacturing industry as well as the service industry.
Hence, rates of income tax and corporate tax vary in the two countries. Since Germany depends on service industry, it imposes greater rates of income tax on individual income. Similarly, given that the United States relies on the manufacturing industry, it imposes high rates of tax on corporate income. Thus, variation in economies and legislations are responsible for differences in taxation and expenditure among countries.
Holtz-Eakin, Douglas. “Corporate Income Tax Rates: International Comparisons.” Congressional Budget Office, 2005. Web. 24 Nov. 2011.
Leetmaa, Peeter, Herve Rennie, and Beatrice Thiry. “Household Saving Rate Higher in The EU than in the USA despite Lower Income.” Eurostat, 2009. Web. 24 Nov. 2011.
Organization for Economic Co-operation and Development. Tax Expenditures in OECD Countries. France: OECD Publishing, 2010.
Shah, Anwar. “Public Sector Governance and Accountability Series: Public Expenditure Analysis.” World Bank, 2005. Web. 24 Nov. 2011.