One of the most important principles governing the collection of taxes in the Federal Republic of Germany is the so-called performance principle. It requires that the state must demand taxes from its taxpayers only to the extent that corresponds to their economic performance. For example, the window tax previously imposed in Germany would be inadmissible under the performance principle, because there is no relation to a service provided by taxpayers. In fact, the performance principle is a feature of all modern tax regimes – even abroad.

1. The Performance Principle – Introduction

It was a long time ago that you had to pay taxes arbitrarily. Even in the Middle Ages, there were certain rules regarding taxes payable. One can cite here as an example the pollutant tax, which one had to pay according to the number of people in a household. The tithe that had to be paid was also limited in terms of the amount of the levy. Nevertheless, we know from historical sources that tax collectors and tax collectors often demanded taxes at their own discretion in order to enrich themselves.

That this could not be a basis for tax collection for a functioning modern state is at least the Scottish moral philosopher and economist Adam Smith in the 18th century. The century has become clear. He is considered the founder of the foundations of modern taxation. Thus, in his seminal work The Wealth of Nations in 1776, Smith set forth the principles of uniformity and certainty of taxation with respect for individual efficiency and the convenience and equity of taxes for the state and taxpayers. These guidelines are followed by most tax laws in the world – to this day.

They are also an expression of the understanding of a state in its relationship to the society it governs, protects and holds together. Because the costs associated with his tasks must be financed through taxes. This is at least true if one wants to exclude the nationalization of all enterprises as an alternative to obtaining state revenue. Nationalization is not a sustainable fiscal solution. At the latest since the end of the Soviet Union and other socialist regimes worldwide, this should be clear. This is because there is simply no incentive to promote productivity – no matter what propaganda slogans, exaggerated success stories and sensational tributes to heroes of work try to make us believe.

2. Characteristics of the performance principle

2.1 Central requirement of the performance principle

What does the performance principle say? It requires that taxation be based on the economic profitability of taxpayers. Those who achieve little economic success should also only pay a correspondingly small financial fee. But those who earn a lot should also pay correspondingly more taxes.

2.2 Performance principle and tax justice are based on the Basic Law

This orientation of taxation according to the performance principle is based in Germany on Article 3 GG. It is the cornerstone of our tax justice. It also echoes in § 85 AO. From a constitutional point of view, one can distinguish a horizontal from a vertical tax justice. Horizontal tax fairness aims to ensure that taxpayers of equal capacity have to pay the same amount of taxes. Vertical tax fairness, on the other hand, demands that increasing performance should be accompanied by correspondingly higher taxation. The extent of excess taxation is by no means clearly defined. Germany is adopting a progressive tax rate. On the basis of vertical tax fairness, however, it could also be a linear tax rate that meets this condition. The fact that we still apply a progressive tax rate is rather due to the welfare state orientation (Articles 20 and 28 GG). A socio-political redistribution is thus constitutionally covered.

In reference to this, it can be assumed that the performance principle assumes the ability of a taxpayer to renounce a certain share of his income. Those who earn little hardly have the opportunity to pay taxes in addition to financing their livelihood. Especially since the livelihood itself is already usually affected by taxation (turnover tax). But those who generate a lot of income generally only need a comparatively small part of it in order to live adequately. The rest therefore also belongs to the state as a potential tax. In any case, the objective and the subjective net principle must also be respected.

2.3 Taxation of net assets under the principle of performance

From this perspective, the taxation of previously net assets does not contradict the performance principle. Capital gains tax, sales tax, property tax, inheritance and gift tax, even the still existing property tax (their collection is currently only suspended) are thus taxes based on the financial capacity of taxpayers. The fact that the income tax already skimmed off the increase in wealth at the time of its creation is only to be understood as the first stage of a potentially recurring taxation according to the efficiency principle.

3. The efficiency principle as a perpetuum mobile of taxation

Now you might think that in response you could simply put the net worth in a savings stocking to prevent you from paying taxes over and over again on the fruit that would otherwise occur. But this is how the very few people who accumulate wealth think. Rather, they are looking for ways to invest their wealth to increase it, but at least to preserve it. Because wealth is also exposed to various risks beyond taxes.

It is precisely this circumstance of the virtually automatic increase in wealth that the state makes use of. That is by invoking the principle of performance. Even if the basis for further investments has already been taxed, there is still potential for further performance in the (re)invested assets. Accordingly, taxation in the sense of the performance principle is also allowed on this.

One could now cynically remark that the state skims off the performance of its taxpayers until the last penny of potential profit has flowed into its coffers, so that taxpayers no longer see any incentive to increase their wealth. But we all know that the state wins this bet in any case. And of course, it makes sense for many people to let wealth continue to work. But even if one decides as a taxpayer one day to spend the earned assets instead of further hoarding or increasing, the state holds its hand. Because then he demands his tribute in the form of sales or real estate acquisition tax.

4th Performance Principle: Curse or Blessing?

If you read it this way and think again, you might get the impression that the state has practically indirectly expropriated the wealthy sections of the population. The mere fact that the affected taxpayers hardly perceive it so clearly is no real consolation here. They may often lament how impudently the state accesses their profits, their assets and that this is tantamount to expropriation, but only a few are really aware of the fact that the hamster wheel increases wealth, which in fact does not allow for exemption from further taxation. And certainly, this picture is strongly distorted (keyword tax design).

Because the state uses the collected taxes for a variety of tasks. All citizens benefit from this, albeit to varying degrees. Now, from the point of view of the service providers, one may criticize the fact that the state uses large parts of these tax revenues, which from their point of view are to a considerable extent based on their capacity, for social expenditures, i.e. benefits to which one is not entitled, from which one can therefore expect no direct advantage (the indirect, one quickly overlooks). Equally justified, however, is the objection of the destitute social benefit recipients that the state uses taxpayers' money to finance motorways, airports and other infrastructure from which they themselves benefit just as much because they neither have their own car nor fly on holiday. Both sides (and everyone in between) are right and wrong at the same time.

The task of a state is primarily to preserve society. If it is necessary that certain layers or groups need state support to achieve this goal, the state uses the taxes collected for this purpose. However, if entrepreneurs also need the necessary infrastructure for their business success for their companies, for example through appropriate training facilities for young professionals, then the state must also provide the necessary funds for this.

Final thoughts on the performance principle

5.1. The performance principle in the test of time

The more advanced a society is, the more complex the network of relationships it carries. The principle of efficiency has proven itself over the centuries as an instrument of a reasonably fair taxation of people. Of course, there are many aspects that can be criticized in the performance principle, such as the taxation of already taxed net assets. But even if a better approach were to be found as a substitute for this, the comprehensive changeover to it could do more damage than adhering to this principle. Again, we can refer to the collapse of the Soviet Union and its consequences.

Although many people take the subjective view that they have to pay disproportionately high taxes, and at the same time few people are able to see the value of the social achievements financed by their taxes, most would probably agree that the performance principle is a fair approach to collecting taxes.

5.2. Use of tax resources

In fulfilling its tasks, it is anything but easy for the state to meet all members of society equally. Often enough, governments and those responsible for their flawed fiscal policies, their prestige projects or their ideologically inflated subsidies, but also for their failures to maintain infrastructure, have been rebuked. The federal taxpayer bureau rightly takes a critical look at government spending year after year.

No question, as a taxpayer you can expect Father State to use taxes more sensibly than before. But it is also up to us as a society that we insist on it and demand it forcefully. Above all, it is in our own interest.

But it is also a fact that we too are negligent in our responsibility to cooperate in this regard. So, the next time you complain about excessive taxes, you should remember the last time you publicly advocated for more sensible tax resources. The best example of the fact that too little effort has been made is the ailing state of our infrastructure. Bridges, railways, health care, the Internet and schools, once considered envious by foreign countries as a model, have become more than an indictment of Germany due to wrong priorities in the use of our tax money. They are a burden for all members of society, a huge problem. That is why the principle of performance will continue to be an elementary principle in the future, which should be strengthened and applied more strongly. Because the performance principle is just as relevant for a functioning state as it is for a fair one.