Summary:

I.

The complainant is the owner of a business. In 1994, he was assessed for income tax together with his spouse. On the basis of a taxable income of DM 622,878, the tax office set the income tax at DM 260,262. The complainant’s trade tax liability as set by the municipality was DM 112,836. The spouses submitted an unsuccessful objection against the 1994 income tax notice. They had complained that the income and trade tax allegedly violated the “50% principle” recognised by the Second Senate of the Federal Constitutional Court by Order of 22 June 1995 (2 BvL 37/91), since the total tax burden on income exceeded 50%. The action with which, in essence, they applied for a reduction of the income tax to DM 187,731 was unsuccessful before both the local Finance Court and the Federal Finance Court.

In particular, the complainant submits in his constitutional complaint that the judgment of the Federal Finance Court violated his fundamental rights under Article 14 of the Basic Law (protection of ownership and property) and Article 19.4 of the Basic Law, as well as Article 2.1 in conjunction with Article 20.3 of the Basic Law (principle of the rule of law and guarantee of effective legal protection).

II.

The Federal Constitutional Court rejected the constitutional complaint as unfounded.

The decision was based, in essence, on the following considerations:

The Federal Finance Court has not violated Article 2.1 in conjunction with Article 20.3 or Senate 19.4 of the Basic Law by failing to comply with a binding ruling handed down by a Senate of the Federal Constitutional Court. Rather, the Federal Finance Court correctly presumed that no binding constitutional limit for the overall income and trade tax burden could be derived from the Order of the Second Senate of the Federal Constitutional Court of 22 June 1995. The order did not concern the question of whether constitutional law limits the permissible overall income and trade tax burden. Rather, it concerned solely the limit on the overall burden imposed on a person’s assets from wealth tax levied in addition to income tax. The impact of the wealth tax burden is not necessarily comparable with the impact of the burden arising from income and trade tax.

The findings of the Federal Constitutional Court in the Order of 22 June 1995 did not recognise a 50% principle with binding effect in accordance with Article 31.1 of the Federal Constitutional Court Act. Neither the operative part of the order nor its essential reasoning lay down a binding limit regarding the permissible tax burden.

The total burden from income and trade tax does not violate the complainant’s fundamental right to freedom of property under Article 14.1 of the Basic Law.

The tax burden falls within the scope of protection of the constitutional guarantee of ownership. The acquisition of property within the meaning of Article 14 of the Basic Law during the tax assessment period gives rise to tax liability under both the Income Tax Act and the Trade Tax Act. The taxpayer must pay because and insofar as their economic capacity is increased by acquiring property.

This impairment of the freedom of property is, however constitutionally justified. The fundamental right of ownership does not give rise to a general binding, absolute limit on permissible burdens according to, in approximate terms, a 50% principle. The wording of Article 14.2 sentence 2 of the Basic Law (regarding property: “Its use shall also serve the public good”) cannot be interpreted as a strict, fundamental principle that property be divided equally between the owner and the state at all times and in all situations. Rather, when determining the limits of ownership, including by imposing fiscal burdens, the legislature is afforded latitude subject to the general principle of proportionality. In this regard, it is necessary to determine the severity of the relevant tax burden, taking into account not only the tax rate as such, but also by the relation between the tax rate and the basis for assessment. Where the basis for assessment is increased, for instance as a result of abolishing indirect tax subsidies or tax deductions, the same tax rate has a greater impact. Furthermore, the taxation of higher incomes must be appropriate in comparison with the taxation of lower incomes. If the legislature opts to enact progressive tax rates, it is in principle not objectionable to impose a high burden on high incomes, provided that after taxes, the taxpayer concerned is left with a sufficiently high income which they can freely dispose of in accordance with the principle that private income serves private benefits. However, even though no strict general tax ceiling can be derived from the prohibition of excessive burdens, the fiscal burden on higher incomes must not, in typical cases, reach level that significantly impaired economic success so that such success would no longer adequately reflected.

It is not ascertainable in the present case that the burden from income and trade tax exceed the constitutionally permissible limit. Furthermore, it is not possible to discern that law on income and trade tax would currently result in an excessive tax burden in relation to high incomes and violate of the guarantee of ownership.