The proportionality principle binds the state in its relationship with its citizens to four important conditions. So his laws and actions must first be legitimate. In particular, this means that they are compatible with the Basic Law. Then they must also be suitable for fulfilling or promoting the legitimate purpose pursued. Of course, such a requirement or action by the state should really be necessary. Last but not least, however, it must also take place to an appropriate extent, i.e. not have an excessive impact on those affected. There is also talk of a proportionality of the measures. After all, all statutory regulations and their application are a violation of the constitutionally protected freedom of every citizen. This must also be respected in the context of taxation under the principle of proportionality.

1. The Principle of Proportionality in Tax Law – Introduction

Absolutist monarchy, dictatorship, even tyranny, are forms of rule that are generally difficult to associate with respect for human rights, especially individual freedoms. This is a key difference to democracies. But what exactly is this respect by the ruling authorities in democratic state structures based on? Who binds legislators to ensure that these freedoms are respected within the legislative, judicial and executive branches? What exactly does this have to do with tax law?

For a short answer to these questions, a single term is sufficient: the principle of proportionality. However, the detailed answer is much more comprehensive. In the following contribution we want to approach it.

2. Principle of proportionality: constitutional anchorage

Since the principle of proportionality is of paramount importance in the relationship between bourgeoisie and authority, one should expect this principle to be explicitly enshrined in the Basic Law. Amazingly, an article that contains and defines it will be searched for in vain. Nevertheless, the principle of proportionality is based on the Basic Law, albeit as its indirect outflow. Many of the provisions of our Constitution deal with aspects that presuppose or require the principle of proportionality. These include, for example, Article 1(3) GG, Article 2(1) GG and Article 20(3) GG.

So, as you can see, the principle of proportionality is a very general principle of law. It therefore applies both to tax law and to all other areas of law. But also in the judiciary and executive branch, the state authority must observe this principle. Even here, there may be an indirect reference to taxes and their collection. For example, this is relevant in case of insolvency or enforcement.

3. Essential characteristics of the principle of proportionality

Another astonishing fact about the principle of proportionality: it contains four special aspects, which in combination form the constitutional principle. We're going to present them one by one.

3.1. Legitimacy of the measures

It is very important that all measures taken by the state as an authority to perform its tasks are compatible with the Basic Law. The Basic Law is the basis for all its actions. Although there may be a reason in extreme situations that makes it appear necessary to curtail the general civil liberties of citizens, this must always be compatible with the Basic Law. Anything that goes beyond this is therefore illegitimate and violates both the principle of proportionality and general civil liberties.

3.2. Appropriateness of the measures

Another aspect that could easily be placed under the heading of self-evidentness is the suitability of measures. It is absolutely clear that in order to achieve a goal, one should use only those means that make a success likely. Here we can give an example from tax law. No matter how many tax laws the legislature introduces and how many types of tax it wants to levy, without the provisions of the tax law with which it regulates assessment and collection, not a single cent of taxes will flow. Therefore, the provisions of the tax code are suitable for effecting tax payments.

3.3. Requirement of measures

Directly linked to this is the need for the measures. This property specifies that government actions pursuing a legitimate objective are permissible only if they are actually necessary for this purpose. If, for example, the tax code states that every taxpayer must wear a blue hat when paying his taxes in even years and a red hat in odd years, then this measure is certainly irrelevant for achieving the objective of generating tax revenue. The principle of proportionality thus prohibits such superfluous governmental requirements.

Now in certain situations one may well argue whether a measure which the state prescribes is necessary or irrelevant. This has been controversially discussed with regard to the exit tax, for example. In such cases, courts ultimately decide, using the Basic Law or even current European law as a guide.

3.4 Adequacy of measures: principle of choice of the mildest

In this context, there is also the question of the optimal option for achieving a goal. For example, one could argue that in order to secure the tax revenue, the state initially retains the income of its taxpayers, for example via the payroll tax, until they have paid the expected total tax for the current year in advance. However, this would mean that, for example, with an average tax rate of 25%, money could only be injected into your own bank account from April.

As you can easily see, this measure is both legitimate and necessary and suitable to help Father State to his tax revenue. However, this type of tax collection is overly rigorous. The principle of proportionality dictates that preference should be given to the least restrictive measure for citizens' freedoms. That is why, in this context, we are also talking about the principle of choosing the mildest option. Here, therefore, it is necessary to weigh up the available means with a sense of proportion. Certainly, however, this also requires a certain degree of creativity on the part of the legislator in order to determine the optimal course of action.

4. The principle of proportionality with regard to tax law

We have already presented some simple examples that should illustrate a violation of the principle of proportionality. Tax law is imbued with this principle. The mere fact that we have to pay taxes under certain rules, tax laws, makes it clear how important the principle of proportionality is in order, on the one hand, to meet the state's need for tax revenue, but also, on the other, to safeguard the right of ownership of taxpayers. Even if the steering effect of taxes is paramount, the respective legislation must comply with the principle of proportionality in all four of the aspects just presented.

The importance of the proportionality principle is most evident in tax estimates (§ 5 AO). Here it is the weighing of the amount of the tax base that is particularly critical. No wonder, then, when many objections and legal proceedings are related to estimates.

Another example where the proportionality principle may currently be violated in German tax law is the special regulation that requires the restriction of loss offsetting in futures contracts. Here it even goes so far that private insolvencies threaten or even occur. Even if, in this context, the steering effect was at the forefront of the legislator’s intention, it is more than questionable whether the principle of proportionality is sufficiently respected in the event of such serious cuts for those concerned.

5. The Principle of Proportionality – Conclusion

Tax law, like all other areas of law, is based on certain principles. In addition to the principle of efficiency, the principle of consistency and the objective and subjective net principle, the principle of proportionality in tax law also counts. In fact, this guiding principle has already been formulated by Adam Smith, who dealt with questions of state leadership and economics in the 18th century. Subsequent financial scientists, such as Fritz Neumark, clarified and extended this and many other principles. It is now an integral part of all tax systems aimed at fair and balanced taxation.