Cars versus Homes…

If you spend a lot talking to people from other countries, you discover how odd certain things are in your own country.

Statistics always show that fewer Germans live in their own home, as in comparable nations. However, many visitors are amazed by the number of shiny new cars in front of rental appartment buildings.

Now this all may come from German’s inexplicable love of cars and a disintirest in owning the place they live in. This is what I thought until recently. That was when I thought about way the consecutive German governments have handled subsidies and taxes on cars and homes.

The reader from abroad may be excused for believing that governments should not discourage home ownership, and car ownership should at least not be subsidised as we all know about their external costs, that is the negative impact on others, be it noise, traffic or emissions.

However, in Germany things are different:

If you want to buy a home, you have to pay 3,5% tax on the value of the property, this will soon rise to 4,5%. You need to add another (in other markets unheard of) 1,5 % for notarisation and public registry. This 5-6 % cost for every transaction dramatically increases the switching cost. If an employee needs to move for a better job, she can easily lose a year’s salary on these costs. (So much for the often cited lack of flexibility of labour). In costs for maintaining a flat, it is well accepted practise, that if you buy a flat to let, it is much more tax efficient than buying it for yourself.

In cars however, everyone who gets a car as part of his salary package, will need to pay monthly income tax on 1% of it’s list price, so maybe 0,4%. This is usually way less as running your car costs you. In particular, as an employee, your monthly burden is totally independent from the price of gas. One of my friends recently bought a Cayenne with the small gas guzzling engine, because it would have been more expensive for him to pay the higher price of a more efficient diesel car.

The tax is on the list price and will always remain the same, no matter how old the car. You are therefore discouraged to drive a company car for longer than 3 years.
We can therefore call this tax break the German New Car Subsidy. I have several entrepreneur friends, who say that their tax adviser advised them to buy company cars in order to not have to give too much of their profit to the tax man.

In conclusion, it might be that the average German might behave in a totally rational way living in a rented flat and driving a huge car.

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