Tax reform despite empty public coffers?!

In Germany a comprehensive tax structure reform has been debated for many years. Now that the German liberal party, FDP, is part of the ruling coalition, this debate has taken on special import. Nina Hetzer and Andreas Peichl, Institute for the Study of Labour (IZA) Bonn, argue in their contribution that despite or even because of the empty public coffers a tax structure reform is long overdue. It need not automatically lead to a reduction of tax revenue and can make a positive contribution to more growth if there is a shift from growth-harming to growth-friendly taxes and if the emphasis is placed less on direct taxation than on indirect taxation. Such a system of taxation would lead to more growth and employment and thus, in the long term, also to higher tax revenues, which in turn would contribute to a long overdue budget consolidation.