by Hew Strachan
Self-evidently, Germany’s difficulty with taxation was not primarily the consequence of insufficient wealth (however illiquid much of it might be, compared, say, with France). It did not begin the war, as Russia and Italy did, with an already limited fiscal base. The problem was political: it was in origin the consequence of the circumstances of the Reich’s foundation.
Broadly speaking, Bismarck had left the power of direct taxation to the individual states. To the Reich he had appropriated indirect taxation, and particularly stamp duty and customs and excise. In the circumstances of 1871 the Reich and not the states possessed the major producer of revenue. Furthermore, the states were obliged to contribute to the running of the Reich at a level set by the Reichstag. These two elements, Reich customs duty and the states’ Matrikularbeiträge, were set in an interlocking relationship in 1879. The Centre party agreed to support Bismarck’s programme of tariffs, on condition that when the yield on customs exceeded 130 million marks the excess would go to the states. The ceiling set on the Reich’s share was sufficiently low to necessitate the survival of the Matrikularbeiträge. The arrangement worked to the Reich’s advantage until the end of the century. Thereafter it did not. Central government activity expanded faster than the consumption of the population. Between 1875 and 1913 the Reich’s net expenses grew five times, but its population only increased by 57 per cent222. The fact that the per capita income of that population was also rising meant little when the Reich had no constitutional right to tax it. Nor did the Matrikularbeiträge provide the flexibility Germany required. They were a head tax, not an income tax: thus their burden on the poorer classes in the more impoverished states of Germany was already heavy. Indeed, the population of Germany, when it aggregated the taxation levied by Reich, state (Land), and commune (Gemeinde), considered itself hard pressed. The exemption level in Prussia was set at the equivalent of £45 (as opposed to £160 in Britain), and by 1903 there were already 3.9 million taxpayers in Germany. In 1913 local authorities (including the states) were responsible for 66.9 per cent of government spending, the Reich for only 33.1 per cent, and 22.6 per cent of the total was funded by income tax.223
Between 1906 and 1913 the Reich was locked in battle with the states in an effort to appropriate some element of direct taxation, and so cover its increasing expenditure on the armed forces. However, this struggle was not simply an issue of governmental centralization; it was also a matter of party politics. The Socialists were in favour of progressive direct taxation; they were prepared even to support a larger army and navy to achieve that aim. The Conservatives were opposed to duties on property, particularly on land, but were compromised by their wish to strengthen the services. The objective of Bethmann Hollweg, in particular, was as much to secure an ongoing majority in the Reichstag as it was to reform Germany’s finances.
The Conservatives’ alarm at the implications of Weltpolitik seemed justified in 1906 itself, when a Reich inheritance tax was imposed. Their opposition rendered it a tax without teeth. In 1911 Wermuth proposed to make death duties effective in order to end the Reich’s deficits. Bethmann Hollweg sought a solution that would be less offensive to the Conservatives. By taxing all property, he hoped to draw more on the wealth of industry. But the opposition of the states to an inheritance tax prompted Wermuth to resign in March 1912. The subsequent budget did no more than adjust indirect taxation, although the Reichstag budget commission required the government to formulate a new universal property tax by 1913. The Conservatives and the Centre party hoped this would be a duty on mobile capital, and wanted it raised by the states; the Progressives and the SPD advocated a central tax on all property.
Wermuth’s successor at the Treasury, Hermann Kühn, planned a tax on capital gains. By not appropriating any of the states’ taxes, by leaving existing wealth untouched and yet imposing a levy on all types of property, he produced a workable and sensible compromise. As originally proposed, this Wehrbeitrag would have taxed any increase in value of over 2,000 marks on all property worth more than 6,000 marks. As enacted, the thresholds were 10,000 marks and 20,000 marks. Most small tradesmen, skilled craftsmen, and peasant farmers were thereby exempted. The rate was progressive, between 0.75 per cent and 2.5 per cent according to the size of the unearned increment.224 The right was appeased by two concessions: agricultural land was assessed on its fictional yield value, which was below the real value on sale; and the total package for 1913 still included increases in indirect taxation. But in overall terms the shift in policy between 1906 and 1913 favoured the less privileged. Consumption taxes over that period rose 19.3 per cent, transport taxes 71.8 per cent, and direct taxes 71.7 per cent. The total Reich yield borne by each of these elements in 1913 was 34 per cent, 9.1 per cent, and 56.8 per cent.225
Nonetheless, it is exaggerated to claim that the Reich had made the breakthrough to a system of progressive taxation, which favoured the poor and milked the rich.226 Such an argument is essentially counter-factual. In 1912/13, at least temporarily, the financial implications of the arms policy created a form of social fusion; that fusion possibly prefigured the liberal Reichstag majority of 1917/18. But the tax that had made this possible was not envisaged as part of the normal peacetime financial arrangements of the Reich. The Wehrbeitrag was a one-off contribution to defence, to last three years only. The direct tax levied on each individual was still only half that of Britain, and the total tax burden little more than that.227 The Wehrbeitrag was a reflection of international tension more than a reform of fiscal principles.228
Above all, there had been no intellectual shift in the Reich. The acquisition of limited powers of direct taxation did not produce the determination that taxes rather than loans should be the main means of financing a war. Even in peacetime, borrowing was the means by which to finance increased defence spending. This was a principle established by the build-up of the navy, and by 1913/14 65.3 per cent of all Reich debt had been incurred through expenditure on the colonies, the army, and the navy. As a corollary, servicing the debt the armed forces largely generated itself became a significant element of Reich expenditure—about 11 per cent of the whole in 1913.229 In an influential text of 1912, Kriegssteuer oder Kriegsanleihe?, Heinrich Dietzel argued that war should be paid for out of loans, or in other words, that taxation should be deferred. He anticipated that wartime taxation would reduce consumption and encourage the withdrawal of investments: given a limited understanding of inflation, both consequences seemed to him undesirable. Dietzel was anticipating a short war. Taxation, because of the lag in its collection, would be much slower in raising money than the issue of government loans. Finally, Dietzel warned against fostering a divisive political debate just at the point when the nation needed to be united.
Dietzel did not go unanswered. Jakob Riesser, a National Liberal and a banker, called for a sound budget resting on direct and indirect taxation in Finanzielle Kriegsbereitschaft und Kriegführung (2nd edition, 1913). Riesser advocated what became the orthodox rule of thumb for liberals, that one-third of a war’s costs should be met through tax.230 But it was the writings of Dietzel, not of Riesser, that found reflection in what Helfferich did. The fact that Dietzel’s title posited taxation and loans as competing alternatives encouraged the view that one was the replacement for the other; the possibility that both might be required was neglected. Indeed, Helfferich even harboured the hope that the loans would not be redeemed by deferred taxation but by payments from the defeated enemy. When he took over from Kühn at the Treasury on 26 January 1915 he already had behind him the experience of advising the chancellor on appropriate levels of enemy indemnity.231
However, Helfferich’s major concern as finance minister was not pecuniary but political. The Burgfrieden was too recent, too fragile, and too precious for it to be sacrificed on the altar of fiscal rectitude. Any increase in direct taxation would please the left and would augment the power of the Reichstag; therefore it could be calculated to antagonize the right and the Bundesrat. Helfferich received
clear warning of the limits this imposed on his effective powers in July 1915. The Bundesstaaten told the Reich that it would not be allowed to renew the Wehrbeitrag.232
The German government was therefore caught in a cleft stick. Its traditional source of revenue, indirect taxation, was a wasting asset. The Socialists would only agree to increased duties on consumption if they were accompanied by the taxes on income opposed by the right. But more significant than the political arguments were the falling returns on existing rates of duty because of the war. Customs were eased in an effort to attract goods to Germany despite the blockade. In 1913 they had raised 679.3 million marks (or 30.8 per cent of Reich revenue); in 1915 they contributed 359.9 million, and in 1918 133 million. Domestic duties were caught by the decline in national income. Taking 1913 as 100, the most optimistic index shows a fall in national income to 88 by 1918, and the most severe to 57.233
Neither the 1914 budget, introduced by Kühn, nor that of March 1915, the first actual war budget and the first proposed by Helfferich, showed any change in the structure or rates of tax. Without the Wehrbeitrag—which produced 637.4 million marks in 1914 and 307.8 million in 1915—the position would have been bleak. Receipts under most of the major traditional heads fell. The exception, significantly, was the Reich printing works, busy producing notes for the government, the Reichsbank, and the Darlehenskassen. The Matrikularbeiträge remained constant (as they did throughout the war) at 51.9 million marks. Total Reich income in 1914 was 2,471.1 million marks (excluding the net profits on postal services and railways); in 1915 it fell to 1,825.2 million marks.
In 1916 the Wehrbeitrag would decline to 19.5 million marks. Rebuffed over its renewal, Helfferich had to find a substitute. He suggested a tax on all wartime profits, to be levied on a scale of up to 15 per cent of the increase in value of property or 30 per cent of the income. But inherited property and corporate profits would be excluded, and he did not envisage introducing the tax until after the war. Helfferich found he had struck a chord both with the Bundesrat and with the public. On 30 November 1915 he formally introduced a proposal for a war profits tax.
This time company profits were included. Businesses were to deposit 50 per cent of gains in excess of their pre-war average over five years in a special reserve fund. The tax would be drawn from the fund. The complicated arrangement was designed to forestall the distribution of the profits on the second year of the war before a definitive law had been passed. The proposal and the debate were uncontentious. By building on the principles of the Wehrbeitrag, the tax could be construed as a once-and-for-all levy on capital gains accrued in the calendar years 1914, 1915, and 1916. The income which had been consumed or capitalized during this period would be liquidated without the imposition of a direct income tax at a time when the cost of living was increasing. The Bundesrat was therefore convinced that the states’ rights to income tax were unimpinged. Conversely but conveniently, the Socialists— although wanting the tax to be at a higher rate than was the case—were persuaded that the tax was a Reich levy on income. Even the industrialists had little to complain about. At first only public companies were affected, and they—by virtue of Helfferich’s notice in July—had had time to take evasive action. Furthermore, they could still draw on the special fund in order to subscribe to war loans. Private companies and individuals remained exempt until June 1916. The Reichsbank alone was severely handled. Its release from the tax on its note issue and the increased circulation of notes had boosted its profits, three-quarters of the excess on which were now diverted from its private shareholders to the government.
Helfferich’s budget of March 1916 therefore marked a first attempt to put Germany’s war finances on a firmer foundation. The war profits tax was set at a rate of 10 per cent on a 2 per cent excess, rising in steps to 30 per cent on sums above 15 per cent. If average profits were more than 25 per cent of paid-up capital and reserves, then a surcharge of up to 50 per cent was payable.234 Similarly for individuals, 50 per cent was the maximum rate of tax on the nominal increase in their assets (on an increase of more than 400,000 marks).235 Property, provided it retained 90 per cent of its value as at 31 December 1913, was taxed at 1 per cent; increased wealth derived from inheritance or from insurance payments was exempt. None of this became law until June, and it had little impact on revenue until 1917.
The remainder of Helfferich’s budget rested on more traditional devices. Excise duties began to climb back to their pre-war yield, principally thanks to an increased duty on tobacco; the rates on alcoholic drinks were untouched, and continued to fall. His proposal to impose a stamp duty on almost all transactions was thrown out by the budget committee of the Reichstag, on the grounds that it would inhibit business. Goods tended to change hands many times on the market, and commercial circles therefore preferred a sales tax on finished goods. The budget committee replaced Helfferich’s proposed duty with a charge of one-thousandth on the value of sales in kind, a tax that hit small shopkeepers more than the powerful figures represented in the chambers of commerce.236 Although a potentially powerful generator of revenue, a value-added tax in prototype, the tax’s rate was too low to be of much short-term significance. The combined outcome was disappointing. Helfferich had projected revenue of 2,749.2 million marks for 1916, hoping thus to balance the ordinary budget (including debt charges of 2,308.7 million marks). Actual income was only 2,122.2 million marks, and ordinary expenditure rose to 3,066.8 million marks.237
Helfferich’s move to the Ministry of the Interior resulted in the appointment of Graf Siegfried von Roedern as his successor at the Ministry of Finance on 1 June 1916. Roedern’s budget of February 1917, although apparently harsh, was rightly criticized in the Reichstag for not going far enough. Roedern announced that he needed an additional 1,250 million marks to be raised through taxation in order to cover interest payments. He got 1,473 million. But in 1917 the net debt increased by 36,092.9 million marks, with the result that the interest payments alone were running at 3,250 million marks on 1 April 1917.
Furthermore, much of the increased revenue was the legacy of Helfferich’s 1916 budget, now fully operational. Total receipts for 1917 were projected at 4,026.7 million marks; in the event 8,010.1 million were raised. Half of this came from Helfferich’s war tax, to which Roedern added a 20 per cent surcharge. Roedern was also the beneficiary of Helfferich’s budget in the duty on tobacco, whose yield—at 419.5 million marks for 1917—was double that of 1916 and eight times its pre-war level. His own principal innovations fell into the trap of creating revenue that was largely fictitious. Coal was taxed at 20 per cent of its sale price at the mine. The attractions of the coal tax were its ease of collection (only about 500 firms were involved) and the possible stimulus to neutral imports through an increased domestic price. But the principal consumer of coal was ultimately—via the arms industries and its products—the government. To spare it a double burden, coal was exempted from the other major new tax, on the transport of goods and individuals.
Reich revenues for 1918 fell to 7,395.2 million marks. Principally, this was because the war profits tax was a one-off arrangement, which required renewal or reconstruction to be effective for 1918. Roedern felt that direct taxation was incompatible with the government’s preferred method of war finance, that of loans. Both could be seen as chasing the same wealth, and appropriation through the former might inhibit voluntary subscription to the latter. Furthermore, Roedern still preserved the notion that direct taxation had not become a permanent feature of the Reich’s finances: he was prepared to use it only to reduce accumulated debt and not to cover current deficits. Therefore, although his budget of July 1918 contained a dozen new laws, and effectively ten new taxes, it was heavily weighted towards indirect taxation. The war profits tax produced only 791.8 million marks under the 1916 law and 1,617.2 million under Roedern’s 1918 provisions. The tax on company profits was set at 60 per cent, but was reduced for profits of under a million marks, and could also be set against any losses regis
tered in previous years. Increases in income were taxed on a scale beginning at 5 per cent for the first 10,000 marks and which rose in five steps to 50 per cent over 100,000 marks. The tax on property, although levied not on the increase in value but on the sum itself, was presented as a tax on accumulated income which had been capitalized. It was applied at a rate of one-thousandth on the first 200,000 marks, and also rose in five gradations, to five-thousandths on more than 1 million marks. Most of the indirect taxes fell on drinks, both alcoholic and non-alcoholic. Luxuries carried a purchase tax of 10 per cent. The biggest change was to the turnover tax, which at 5 per cent on all dealings not only produced 823.4 million marks in 1919 but also forced a foreshortening in the number of transactions and so discouraged speculation238.
Roedern’s 1918 budget showed how little the fundamental lineaments of German thinking had shifted throughout the war. His indirect taxes were meant to yield an additional 1,564 million marks in 1918; they actually produced 486 million.239 Germany’s failure to milk fresh areas of liquidity was therefore more than a simple matter of fiscal lag. Peacetime yields were still being expected of taxes on consumption despite the facts that national income was diminishing and that the state had appropriated the powers of production.
By the same token, Germany fudged the issue of direct taxation in new areas. War profits, after all, might be deemed sufficiently exceptional to be outside the ambit of the peacetime restrictions on direct taxation by the Reich. But Germany failed to establish a coherent model for the management of its war industry. The question of excess profits prompted the Reichstag to establish a committee on war supplies in June 1916, but it did not meet for the first time until December and it ended its proceedings, after fourteen meetings, in February 1918.240 In July 1917 Wilhelm Groener, as head of the newly created war office, proposed controls on profits and wages and urged a sharpening of the war profits tax. Shortly thereafter he fell victim to the machinations not only of heavy industry but also of OHL itself241.