Germany: Tax increase for freelancers

Members of the German Parliament Dec. 12, 2012 in Berlin. If the Bundestag passes the self-employment Social Security tax, tax burdens will rise significantly on millions.
Robert Schlesinger

BERLIN, Germany — Giulia Pines Kersthold left the United States to fulfill her dream of living in Europe. She landed in Berlin, famous for its low cost of living, openness and boundless creativity.

But four years later, the 28-year-old writer worries that dream may soon be over — the German government is mulling a mandatory social security tax on the self-employed that could add upwards of 300 euros ($400) a month to her operating costs.

“Part of the reason most people move to Berlin from America, especially from New York City, is that the costs are so much less here,” said Pines Kersthold. “But if you’re suddenly forced to pay an additional 300 euros [a month], you think ‘OK, I’m moving back to New York — what’s the point in actually doing this?’”

Kersthold is part of a growing number of freelancers — including numerous Americans — across Germany. In a country of more than 81 million, only 4.2 million are registered as self-employed, but that number is growing: It has soared by 40 percent over the past two decades.

That’s a trend the German government says it wants to promote, and accelerate.

Over the past few years, Europe's largest economy has tried to find ways to put people to work, especially the young, while diversifying its economy, largely dependent on export-led, mid-sized and large companies. New initiatives to encourage people to start their own businesses have set up advice lines and support programs for would-be entrepreneurs.

The thinking goes: red tape, tight credit and a lack of entrepreneurial culture hinder business creation — and therefore employment and growth.

“Young business founders have a dynamic and an entrepreneurial spirit that we need here in the business hub that is Germany,” said Philipp Roesler, Germany’s economy minister, at a meeting with young startups in August.

“These young businessmen and women represent a decisive part of Germany’s future, driving innovation and growth in large parts of the German economy and creating high quality jobs.”

But that vision is clashing with a need to provide for Germany's expensive pension system. Its costs will grow as the population ages, low birthrates stagnate, full-time employment declines and immigration policies firm up.

With this flat tax proposal, critics say the situation is reaching the absurd — it will undermine the push to create small businesses and increase the numbers of unemployed and underemployed that are already straining the public welfare budgets.

And, they say, it will make a mockery of the recent slogan: "Germany, a land for innovation."

“If politicians want more German innovation, and are always complaining that there is so much coming out of the USA, especially in the web industry, that we’re always running to catch up and that we’re copycats, then they should think about giving people some freedom,” said Tim Wessels, who co-founded an IT support company called Fair + Friendly, with branches in Muenster and Hamburg.

Pay up, people!

In Germany, freelancers in what are deemed specialized professions — including medicine, architecture and law — already pay into private pension funds. Now, Germany’s Labor and Social Affairs Ministry is turning its attention to approximately 3 million self-employed workers who are not required to contribute to a pension scheme — and making sure they pay up.

“The biggest reason for it is that our working environment has changed,” said Christian Westhoff, deputy spokesman at the ministry. “In Germany it’s had the effect that we have more freelancers earning less that are not obligated to put money away for their retirement.”

German media has reported that the government was debating a flat-rate tax between 300 euros and 350 euros ($400 to $457), though ministry officials have disputed that figure. They say no fixed amount has been set because they are still examining existing assets and pension contributions before making any decisions.

Westhoff says the goal is to ensure workers contribute enough money now to secure the minimum pension payment of 700 euros ($915) a month for retirement.

“We’re doing something for the future, for the coming decades,” he said.

Even so, critics say it’s younger generations that would shoulder the burden: Anyone over 50 would be exempt from the tax, with the strictest regulations falling on those under 30.

In Germany, students in universities study longer than in the US, and recent graduates above age 27 are not uncommon. Also, a phenomenon attributed to looser labor rules and the financial crisis has been the emergence of fewer full-time employees as well as the "praktikant kultur" (intern culture), where many young people do six or seven unpaid internships in a row through their 20s before landing some kind of work, even if it isn't permanent or full-time.

And though the unemployment rate in Germany has dropped to record lows in recent years and is currently at 6.7 percent, the numbers hide the amount of underemployed people, especially high among the young, those in the east of the country and in the capital, which lacks industry, and jobs.

Berlin: 'Poor but sexy'

Germany’s “poor-but-sexy” bohemian metropolis is a city of 3.5 million where a colorful mix of artists, students, opera singers and vintage clothing shop owners coalesce and startups particularly in IT thrive on the city’s surprisingly affordable rents and high quality of life.

On weekdays, cafés in Berlin’s trendy Kreuzberg and Prenzlauerberg neighborhoods are humming with the sounds of freelance graphic designers, writers and creative types, chatting over coffee and pounding away at their Mac laptops.

At a co-working space called Co-up in Kreuzberg, Till Klampaeckel, who works as a web developer and technical manager, says he has been a freelancer for more than 10 years. Though Klampaeckel already makes regular payments to a pension fund and wouldn’t be affected by the ministry’s plans, many around him would — and he objects to the principle.

“I like my flexibility, that at the end of the day I can do what I want,” said Klampaeckel. “And I think part of that is deciding how I want to pay health insurance and how I decide to save for my retirement.”

When news of the new proposal leaked, Tim Wessels was so alarmed that he launched an online petition against it. Circulating in the media, on freelance forums, Facebook, and by word of mouth, the number of signatures exploded.

“I was totally surprised,” he said. “I don’t know if I talked to the right person or what, but somehow there was a dynamic where the number of signatures started to double on a daily basis.”

He gathered 80,000 signatures, granting him a meeting with Labor and Social Affairs Minister Ursula von der Leyen. Wessels says she promised to take the torrent of criticism into account, and insisted there would be exceptions, such as an income-based contribution for very low earners and grace periods for those who are just starting out and young entrepreneurs.

Still, Wessels, who has been self-employed since he was 15, says the tax would present a bureaucratic nightmare, and threaten the livelihoods of many colleagues and friends.

“The fear is that it wouldn’t be worth it for them anymore to be self-employed,” he said, adding that an income-based mandatory contribution for all freelancers — like in the US and most European countries — would make more sense.

But the ministry’s deputy spokesman says Germany does support self-employment and innovation — just not at the cost of a sound pension.

“If you’re self-employed and you earn so little, and you continue to do so over a long, sustained period of time, when you make too little to be able to save for your own retirement, then you don’t have a good business model,” Westhoff said.

Others disagree.

“Earning a low income has very little to do with being self-employed, it has to do with what industry or branch you work in,” said Wessels.

Wessels and his supporters have a brief respite: mired in the government’s wider discussions about pension reforms, the ministry has yet to draw up the legislation — but that could happen later this year.

Some say the German government is simply coming up with new ways to save its ailing pension system, and that freelancers aren't an important voting bloc.

"I think the bottom line is they’re short of money,” said Giulia Pines Kersthold, the writer. “I would love to see someone just own up to that.”

While some freelancers say they would have to start working under the table or turn to state welfare to bridge the gap, Pines Kersthold, who is married to a German, is now applying to join the Artist’s Social Security Fund, which contributes to pension and health-care costs for some creative industries.

And she is weighing her choices.

“If this happens, my two options are to give up my Berlin dream and take my husband and move to New York City,” she said. “Or to just give up all my work here.”

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