Almost a trillion euros in taxes – and yet the money is still missing: A bad joke, right?

The large tax subsidy: Why doesn't the money stay in the system?

Taxes and spending: Germany's path to a more effective state

In 2025, Germany will have collected almost one trillion euros in taxes, a record that underscores the country's economic power. Yet despite these enormous revenues, the state seems to be caught in a financial dilemma: Where is the money going? The Austrian economy has achieved only marginal economic growth in recent years, raising the question of why so much capital is not being invested in a visibly more modern infrastructure, a more efficient administration, or better educational opportunities.

This article examines the complex relationship between high tax revenues and inadequate public services. It analyzes the structure of expenditures, political priorities, and implementation efficiency to identify the real problems. While the notion that Germany has a spending problem is widespread, it is clear that not only the amount of spending, but also its use and impact are crucial. At a time of pressing demographic change and technological advancements, it is essential to scrutinize and optimize the use of public resources to ensure a sustainable and future-proof society.

Germany's state is not too poor – it is simply not making enough of its wealth for the future

Germany collected a total of €989.8 billion in taxes in 2025. This was €42.1 billion, or 4.4 percent, more than in the previous year. Tax revenue thus approached the €1 trillion mark for the first time. At the same time, the German economy grew by only 0.2 percent in real terms, while consumer prices rose by an average of 2.2 percent for the year. This comparison alone reveals the core of the problem: The state had significantly higher nominal revenues without this resulting in a comparably strong economic growth, a noticeably more modern infrastructure, or a significantly more efficient administration.

The pointed assertion that Germany has not a revenue problem but a spending problem therefore makes an important point. However, it is only economically sound if a spending problem is understood to encompass more than a blanket call for cuts. The central deficit lies not only in the level of government spending, but also in its structure, its dependence on past political decisions, its often inadequate impact assessment, and the state's limited ability to quickly translate allocated funds into functioning infrastructure, better education, digital services, and enhanced security. Germany thus faces simultaneously a priority problem, a public sector productivity problem, and an implementation problem.

A serious analysis must also distinguish between total tax revenue, the federal budget, and the finances of the state as a whole. The €989.8 billion figure represents the revenue before distribution to the federal government, states, and municipalities. It is not entirely at the disposal of the federal government. After tax distribution, €388.7 billion went to the federal government, €415.3 billion to the states, and €150.9 billion to the municipalities. In addition, there are social security contributions, fees, other revenues, and borrowing. Therefore, anyone who concludes from the trillion-euro mark that the federal government has an equally large amount of financial leeway is comparing different metrics. Nevertheless, the political statement remains relevant: Germany is already mobilizing very large financial resources. The crucial question is what social and economic value the state generates from them.

The tax record rests on consumption and labor

The composition of tax revenues is at least as revealing as their total amount. Value-added tax (VAT) was the most lucrative tax in 2025, generating €310.21 billion. This was followed by income tax at €262.69 billion. Together, these two taxes brought in €572.90 billion, significantly more than half of total tax revenue. The German state thus relies heavily on consumption and dependent employment for its financing. This broad and relatively reliable base stabilizes public finances but simultaneously places a burden on earned income and private consumption.

In third place was assessed income tax at €78.36 billion, followed by trade tax at €76.44 billion. Corporate income tax reached €39.16 billion. These three items reflect income from self-employment, business profits, and municipally taxed business profits. They are more sensitive to economic cycles, profits, investment cycles, and tax planning opportunities than wage and sales tax. Their weight demonstrates that businesses and the self-employed contribute significantly to public finances, but their revenues for the state are less consistent.

The energy tax generated €37.56 billion, non-assessed income taxes €31.19 billion, and withholding tax €24.80 billion. These were followed by insurance tax (€19.61 billion), tobacco tax (€17.63 billion), property tax (€16.09 billion), and inheritance tax (€15.41 billion). Real estate transfer tax contributed €15.10 billion, the solidarity surcharge €12.81 billion, and motor vehicle tax €9.60 billion. The fifteen largest items demonstrate a highly differentiated system in which income, consumption, wealth transfers, real estate transactions, energy consumption, mobility, capital gains, and certain goods are each taxed at different points.

This diversity should not be confused with economic neutrality. Every tax alters incentives. High taxes on labor can make additional employment less attractive, especially for secondary earners and during the transition from part-time to full-time work. Real estate transfer tax increases the cost of property transactions and can discourage job-related mobility. Business tax creates disparities between locations and can make municipal revenues heavily dependent on a few companies. Consumption taxes, on the other hand, ensure a broad tax base but disproportionately affect low-income households because they consume a larger share of their income. Therefore, sound tax policy must not only maximize revenue but also consider growth, distribution, simplicity, and predictability simultaneously.

The 4.4 percent increase in taxes in 2025 was partly a consequence of higher wages, prices, and nominal sales. Nominally increasing revenues do not automatically translate into a correspondingly larger real scope for action. When construction, personnel, medicines, military equipment, and social services become more expensive, government costs also rise. Nevertheless, tax revenues grew faster than economic output at current prices. This suggests that the revenue side by no means collapsed in 2025. Germany's fiscal imbalance therefore cannot be convincingly explained by a general lack of tax revenues.

The trillion does not belong to the federal government

In political debate, three levels are often conflated. The first level is total tax revenue before distribution. The second level comprises the individual budgets of the federal government, states, and municipalities. The third level is the government as a whole, including social security funds and extra-budgetary funds. Each level answers a different question. Tax revenue shows how much the government collects through taxes. The federal budget shows what the federal government directly allocates funds for. The overall government budget shows the combined size of revenues, expenditures, and deficits of all government sub-sectors.

The federal budget closed in 2025 with expenditures of approximately €495.5 billion. Federal tax revenues amounted to roughly €388.6 billion, while net borrowing totaled €66.9 billion. These figures refute the simplistic notion that the federal government has nearly a trillion euros at its disposal. They also confirm that even with rising tax revenues, a significant portion of federal spending was financed by borrowing. The structural problem, therefore, lies less in a sudden shortfall in revenue than in the persistent gap between politically promised expenditures and the regularly available funds.

At the national level, the dimensions were even greater. Government spending in 2025 amounted to approximately €2.26 trillion. This included, among other things, monetary social benefits of around €749.5 billion, social benefits in kind of around €414.9 billion, employee compensation of around €384.3 billion, and intermediate consumption of around €289.1 billion. The government spending ratio, i.e., the ratio of government expenditure to gross domestic product, rose to 50.3 percent. At the same time, a national budget deficit of approximately €107 billion emerged.

A government spending ratio above 50 percent does not, in itself, prove wastefulness. It includes pensions, healthcare, long-term care, education, internal and external security, infrastructure, the judiciary, public administration, and municipal services. Countries with extensive social security systems systematically have higher ratios than countries where private households finance comparable services themselves. Therefore, what matters is not just how much the state spends, but whether it uses these funds to generate reliable services, social stability, and a productive foundation. A high government spending ratio becomes problematic when it coincides with weak growth, investment gaps, lengthy procedures, and low perceived efficiency. This combination is precisely what characterizes the German debate.

More money does not automatically lead to better performance

The strongest evidence of an efficiency problem is not a single, supposedly superfluous expenditure. It is the recurring experience that additional budget funds do not translate proportionally into additional government services. Between a political commitment of funds and a functioning bridge, a renovated school, or a working digital system lie planning, permitting, awarding contracts, recruitment, construction capacity, technical standards, and coordination across multiple levels of government. If this chain breaks down, more money initially increases budget allocations, but not necessarily actual performance.

The investment year 2025 illustrates this contradiction. While gross government investment rose sharply to €147.5 billion, an increase of 12.3 percent compared to the previous year and equivalent to 3.3 percent of gross domestic product, its share of total government spending remained at only 6.5 percent. A large portion of government funds continued to flow into current services, transfers, personnel, and intermediate goods. Investment increased, but remained limited relative to the overall size of the government.

The implementation problem becomes even clearer in the federal budget. €115.6 billion was earmarked for investments, but only €86.8 billion was actually spent. The outflow of funds thus fell short of projections by €28.8 billion. This is not an argument against investment, but rather against the notion that additional borrowing authorizations will automatically resolve the investment backlog. Financial flexibility is necessary, but not sufficient. Without projects ready for planning, standardized procedures, adequate administrative capacity, and faster decision-making, the government can provide billions while simultaneously building too little.

This leads to a key distinction: Germany doesn't need to spend less everywhere, but rather differently and more effectively in many areas. Additional tangible improvements are needed in defense, transportation networks, energy infrastructure, schools, research, and the digitalization of public administration. At the same time, consumption expenditures, subsidies, and existing programs must be more rigorously evaluated based on whether they achieve their objectives. A policy of pure cuts could exacerbate the investment backlog. Conversely, a policy of pure expansion could simply fund inefficient structures with ever-increasing amounts of money. Both would be economically inadequate.

The welfare state is displacing the future state

The federal budget demonstrates how strongly past commitments determine the current scope for action. In 2025, the budget for labor and social affairs, at approximately €190.3 billion, was by far the largest single item, comprising nearly 38 percent of the federal budget. Around €122.5 billion was earmarked for pension insurance contributions. Nearly €52 billion was allocated for basic income support for job seekers. These figures clearly illustrate that a serious spending reform cannot focus solely on business trips, government buildings, or individual funding programs.

Demographic change is exacerbating the problem. By 2025, for every 100 people aged 20 to under 65, there will be approximately 40 people aged 65 and over. As the baby boomers retire and smaller cohorts enter the labor market, spending on pensions, healthcare, and long-term care will increase, while the contributory working-age population grows more slowly. Without reforms, either contributions, tax subsidies, the retirement age, or debt will have to be increased, or benefit levels will have to be adjusted. None of these options is politically convenient.

Federal subsidies to the pension insurance system also fulfill broader societal functions that should not be financed solely through contributions. Therefore, it would be wrong to portray them entirely as an extraneous burden. Nevertheless, they tie up a growing portion of the federal budget. The more funds automatically flow into existing entitlements, the less remains for education, digitalization, infrastructure, or tax relief. The expenditure problem is thus primarily a problem of increasing fixed expenditures.

Health and long-term care are also under pressure. Medical advances, higher wages in the healthcare sector, a growing number of elderly insured individuals, and increasing care needs are driving up costs. While contribution increases provide short-term solutions to financing problems, they do little to address the underlying issues of volume, price, and efficiency. What is needed are improved patient management, consistent digitalization, a more efficient hospital structure, increased prevention efforts, and a clearer separation of non-insurance-related services from contribution-funded tasks. Without such reforms, social insurance will become the second major source of revenue alongside the tax system.

Social reforms, however, must not be reduced to across-the-board benefit cuts. A high-performing welfare state stabilizes demand, protects against existential risks, and can increase the willingness to embrace economic change. Crucially, benefits must be designed more precisely, perverse incentives must be limited, and administrative systems must be simplified. Where multiple agencies collect similar data, different benefits coexist, or rules on supplementary earnings make additional work unattractive, high administrative costs and unfavorable work incentives arise simultaneously. Efficiency and social security are therefore not mutually exclusive. A simpler system can be fairer, more transparent, and more cost-effective.

Work carries a particularly heavy burden

In 2025, income tax, at €262.69 billion, was the second largest single source of tax revenue. This was supplemented by contributions to pension, health, long-term care, and unemployment insurance. For an average-earning, single employee without children, the burden of income tax and employee and employer contributions was very high by international standards. The so-called tax and contribution wedge reached approximately 49.3 percent of labor costs in 2025. Germany thus ranked second among OECD countries.

This burden has real consequences. For employees, it reduces the financial gain from additional working hours. For companies, it increases the cost of employment, even if the employer's contribution doesn't appear as a deduction from the employee's payslip. From an economic perspective, both sides are part of labor costs. In an aging society that needs more employment, skilled immigration, and a higher full-time employment rate, a particularly heavy burden on labor is contradictory.

New general taxes or higher social security contributions should therefore not be the first response to rising expenditures. Every additional burden must be weighed against its effects on employment, investment, consumption, and the attractiveness of a location. This does not mean that all tax increases are out of the question. A broader tax base, a more consistent reduction of unjustified exemptions, and more effective measures against tax evasion can secure revenue without further increasing regular rates on labor. The distribution of tax burdens between labor, consumption, real estate, and environmentally harmful behavior can also be readjusted.

Reducing the burden on labor would only be credible if it were financed. If taxes are lowered without reforming spending or generating other revenue, the deficit will increase. A growth-oriented fiscal policy must therefore combine spending prioritization and tax reform. The goal should not be the smallest possible state, but rather a state that ties up fewer resources on complexity and creates more room for private and public investment.

Bureaucracy is an invisible additional tax

Bureaucracy places a double burden on the state. Within the administration, it ties up personnel, lengthens procedures, and increases the cost of projects. Outside the state, it forces businesses and citizens to spend time and money on proofs, reports, documentation, and multiple applications. The National Regulatory Control Council estimated the cost of bureaucracy at around €64 billion per year. While the annual compliance burden decreased by approximately €3.2 billion during the reporting period from July 2024 to June 2025, the initial level remained high.

These 64 billion euros should not be confused with budget expenditures that can be cut directly. A large portion of this revenue is generated in businesses and private households. Therefore, reducing bureaucracy does not automatically lead to equally high savings in the federal budget. However, it can have a similar effect on the overall economy as such a reduction: employees gain time for productive activities, investments are realized more quickly, and public administrations require less staff for recurring review and data collection processes.

The core problem often lies not in a single form, but in the architecture of the state. Germany distributes responsibilities across the federal government, states, municipalities, social security institutions, chambers of commerce, and specialized agencies. Federal diversity can foster competition and citizen-friendliness. However, it generates high costs when data formats, software, application procedures, and legal interpretations differ. Digitization then becomes not a simplification, but merely the electronic representation of old processes.

Effective state modernization therefore begins in front of the screen. Procedures must first be simplified, documentation reduced, and responsibilities clarified. Only then can shared digital components, linked registers, and a consistent one-stop-shop principle be introduced. Citizens and businesses should not have to resubmit data that is already legally held by one government agency to another. Standardization is not an end in itself, but rather a prerequisite for reusing digital solutions instead of developing them anew thousands of times.

Subsidies need an expiration date

A significant portion of public spending flows through subsidy programs, financial aid, and tax breaks. For 2025 alone, federal financial aid totaling €58.2 billion was earmarked. Many of these pursue legitimate goals, such as lower electricity costs, building renovation, microelectronics, social housing, hydrogen infrastructure, and broadband expansion. The environmental and industrial policy benefits of individual programs can be substantial. Nevertheless, a politically desirable goal should not be equated with automatically effective funding.

Subsidies carry typical risks. They can trigger windfall gains if recipients would have made an investment anyway. They can lock in technologies or business models before it's clear which solution will prevail in the long run. They can create powerful interest groups that permanently defend aid that was originally intended to be temporary. Tax breaks are particularly difficult to control because they don't appear in the budget as direct expenditures, but have the same economic effect: The state forgoes revenue for the benefit of selected groups.

Therefore, every major funding initiative should be accompanied by a clear objective, verifiable key performance indicators (KPIs), and an expiration date. After this date, it would need to be re-justified. Evaluation should not only record whether money was spent, but also what additional impact it had. For climate programs, for example, avoided emissions per euro invested would be relevant; for innovation funding, additional private research spending, patents, or scalable production; and for regional programs, sustainable employment and productivity would be key.

Systematically phasing out ineffective subsidies is politically more difficult than introducing new programs. The benefits of subsidies often concentrate on a small, manageable group, while the costs are spread across millions of taxpayers. Therefore, the beneficiaries organize stronger resistance than the burdened general public. This is precisely why independent evaluations, transparent subsidy databases, and automatic phase-out rules are needed. Budget consolidation should not be based on the volume of lobbying efforts, but on proven effectiveness.

The state measures spending instead of results

Traditional budget management focuses on whether funds were legally allocated and spent. This is necessary, but insufficient. A ministry can execute its budget formally correctly and still achieve little impact. Conversely, an underutilized budget allocation can indicate a lack of administrative capacity, unrealistic planning, or delays. Modern fiscal policy must therefore shift from input-based to output-based management.

For larger programs, a few easily understandable targets should be defined before they begin. For roads and railways, these could include condition, capacity, availability, and project duration. In education, skills, graduation rates, and social mobility would be more important than the sheer number of individual qualifications awarded. In public administration, processing time, end-to-end digital processes, error rates, and user satisfaction are key. In labor market policy, the crucial factor is whether people achieve permanent, regular employment, not how many programs have been initiated.

A results-oriented approach does not mean reducing complex public tasks to a single metric. Poor performance indicators can lead to mismanagement, and some services, such as legal certainty, crisis preparedness, or cultural infrastructure, can only be partially valued in monetary terms. Nevertheless, the alternative is not to forgo measurement altogether. What is needed is a balanced system of quantitative indicators, qualitative assessment, and regular external audits.

Spending reviews should become an integral part of the annual budget process and have real consequences. New priorities should not simply be added to existing programs. For every major new long-term task, it should be examined which existing programs can be discontinued, consolidated, or scaled back. This approach forces policymakers to recognize opportunity costs. Every euro can only be spent once, even if borrowing postpones the burden.

Saving and investing are not opposites

In public debate, consolidation is often portrayed as the opposite of investment. Economically, this distinction is too simplistic. If inefficient subsidies, duplicate structures, and poorly targeted transfers are reduced, and the freed-up funds are redirected to infrastructure, education, or research, total expenditure may not decrease, but its impact on growth will increase. Conversely, expenditure nominally recorded as investment can have little effect if projects are poorly selected or implemented at excessive costs.

Germany needs a protected core of investment, but not a carte blanche for every project. Crucial factors are the economic benefit, the project's readiness for implementation, and its life-cycle costs. A new road, railway line, or digital platform incurs ongoing operating, maintenance, and renewal costs after its construction. Those who only consider the initial construction costs underestimate the long-term impact on the budget. Sound investment planning therefore considers the entire life cycle and prioritizes the maintenance of existing networks when it is more cost-effective than later replacement.

The significant gap between planned and actual federal investments demonstrates that additional funding must be accompanied by institutional reforms. Planning and approval processes should run in parallel rather than sequentially, standards should be more broadly harmonized, and recurring building types should be standardized. Municipalities need access to technical and legal expertise to prepare projects effectively. Approval authorities, in turn, require clear deadlines, digital files, and sufficient qualified personnel.

Public procurement also offers considerable potential. Overly detailed specifications, inconsistent thresholds, and the fear of subsequent complaints encourage lengthy procedures and defensive decisions. Simplification must not eliminate transparency and competition. However, it should focus more on functionality, quality, speed, and overall costs, rather than on the formal perfection of individual procedural steps. Joint procurement can create economies of scale, as long as it does not produce new central bottlenecks.

A reform agenda for greater impact

A sustainable spending reform must address the major budget categories while simultaneously increasing the state's capacity to implement them. As a first step, the budget needs a binding order of priorities. Security, functioning infrastructure, education, research, digitalization, and targeted social protection form the productive core. Programs outside this core should be regularly justified from the ground up, instead of automatically continuing their previous year's budget allocation.

The second step is to make social security systems resilient to demographic changes. In the pension system, this means a balanced combination of longer working lives, higher employment rates, skilled immigration, supplementary retirement savings, and an honest discussion about the relationship between contributions, tax subsidies, and benefit levels. Rigid solutions fall short because professions and health burdens vary. A flexible transition with effective incentives for working longer is more economically sound than a purely formal increase that is undermined by exceptions.

In the third step, administrative digitization must be treated as an organizational reform. Shared registers, uniform interfaces, digital identities, and standardized procedures should be implemented across all levels of government. Automation is particularly suitable for high-volume, rule-based processes. Complex individual cases still require human decision-making. This allows staff to be shifted from routine tasks to advising, monitoring, and handling demanding cases.

In the fourth step, every major subsidy needs an expiration date and independent impact assessment. Failure to meet targets must lead to reductions, restructuring, or termination. Climate protection, resilience, and technological sovereignty remain legitimate objectives, but their financing should be technology-neutral and competitive, insofar as the respective objective allows. Ongoing operating subsidies must not become a substitute for a viable business model.

The fifth step should be to reduce the tax burden on labor. This can be financed through a reallocation of spending, the elimination of inefficient tax breaks, a broader tax base, and improved enforcement of the law. Such a reform must transparently demonstrate its distributional effects. Relief measures should be targeted particularly where additional work is currently heavily burdened by taxes, contributions, and the withdrawal of transfer payments.

In the sixth step, the state must professionalize its investment pipeline. A multi-year, publicly verifiable project list, including its stage of development, costs, timeline, and expected impact, would prevent political announcements from being confused with actual construction progress. Unspent funds should be analyzed: Was it due to a lack of projects, staff shortages, legal proceedings, market prices, or political changes? Only such a diagnosis allows for targeted remediation.

Why across-the-board cuts would fail

Despite all potential for efficiency improvements, it would be wrong to claim that the state can solve its financial challenges simply by cutting obvious waste. The major expenditure categories are largely based on laws, individual entitlements, employment relationships, and long-term commitments. Anyone who wants to achieve lasting savings of tens of billions of euros must change benefits, eligibility criteria, personnel structures, or subsidies. This has concrete distributional effects and generates political conflicts.

The hope that digitalization will generate large budget surpluses in the short term is also exaggerated. Initially, it requires investments in technology, data quality, cybersecurity, training, and organizational restructuring. Savings only materialize when old processes are actually eliminated, parallel paper-based workflows are discontinued, and tasks are redistributed. Simply adding an additional digital interface to existing structures will actually increase costs.

Nor should the need for investment be downplayed. Dilapidated transport infrastructure, inadequate military capabilities, sluggish network expansion, and public buildings in need of renovation are real economic burdens. Neglecting maintenance is not thrift, but rather deferred expenditure that often proves more expensive later on. A convincing consolidation strategy therefore protects productive investments and seeks savings primarily in ineffective, poorly targeted, or unnecessarily complex ongoing expenditures.

Finally, significant differences exist between levels of government. Some municipalities have a strong tax base, while others bear heavy social welfare burdens and a large backlog of necessary repairs and renovations. A blanket statement about excessive revenues can mask local financial problems. Reforms must therefore also consider the distribution of responsibilities and revenues between the federal government, states, and municipalities. Those who mandate a task by law should ensure its long-term funding and avoid increasing the cost of implementation through unnecessary, overly detailed regulations.

The real scarcity is the state's capacity to provide services

Germany is neither a penniless state nor a country without legitimate additional financing needs. Nearly one trillion euros in tax revenue in 2025 demonstrates an exceptionally strong revenue base. At the same time, a national deficit of around 107 billion euros, a government spending ratio of more than 50 percent, and high borrowing levels show that existing service commitments cannot be fully financed by regular revenues. Both can be true simultaneously.

The most economically convincing perspective is therefore this: Germany primarily has a structural problem with spending, allocation, and implementation, but not solely a revenue problem. The state spends a great deal, tying up a large portion of it in consumption-related and demographically growing obligations, and converting too small a portion into productive future-oriented services with insufficient speed. New revenue streams may be necessary in certain areas, but they should not serve as a substitute for reforms.

Therefore, before any general tax and contribution increases, a thorough review of expenditures must be conducted. Which programs are demonstrably effective? Which services can be organized more simply? Which subsidies have fulfilled their purpose? Which tasks are being performed multiple times? Which investments fail not due to a lack of funding, but due to procedural issues? And which social commitments are sustainable in the long term under the conditions of an aging population? These questions are politically more difficult than simply raising a rate, but economically unavoidable.

The measure of successful fiscal policy cannot be the size of the budget alone. What matters is the benefit of every euro spent. A high-performing state repairs bridges before they have to be closed, processes applications in days instead of months, provides targeted protection for those in need, procures safety equipment in a timely manner, and creates regulations that businesses can understand and comply with digitally. This requires money, but also clear priorities, functioning institutions, and the willingness to dismantle ineffective structures.

The nearly one trillion euros in tax revenue is therefore neither proof that every government expenditure is superfluous, nor a license for new burdens. It is a mandate for accountability. The higher the revenues and taxes, the greater the obligation to deliver tangible results. Germany's crucial fiscal reform does not consist of blindly shrinking the state or further expanding it. It consists of finally transforming an expensive state into an effective one.