Judgment of 24 June 1958

R e a s o n s :

A.-I.

1

The Law on the Reorganisation of Taxes (Gesetz zur Neuordnung von Steuern) of 16 December 1954 (Federal Law Gazette, Bundesgesetzblatt – BGBl. I p. 373) extended the option to deduct expenses for certain tax-privileged purposes in the determination of taxable income to expenses for the promotion of public policy purposes. This option had initially been created through § 10 of the Income Tax Act (Einkommensteuergesetz – EStG) in the version of 15 September 1953 (BGBl. I p. 1355) and § 11 no. 5 of the Corporation Tax Act (Körperschaftsteuergesetz – KStG) in the version of 13 April 1954 (BGBl. I p. 97). […]

2-6

[…]

7

Consequently, in the Income Tax Act in the version of 21 December 1954 (BGBl. I p. 441), § 10b […] was worded as follows:

8

Tax-privileged purposes

9

Expenses for the promotion of charitable, religious, academic or public policy purposes and those for public benefit which are recognised as deserving of particular support are deductible as special expenses in the amount of five per cent of the total amount of income or two per mille of the sum of the total revenues and the sum of the wages and salaries paid within the calendar year. For academic and public policy purposes, the percentage increases from five per cent by an additional five per cent.

10

In the Corporation Tax Act in the version of 21 December 1954 (BGBl. I p. 467), § 11 no. 5 received the following wording […]:

11

In the determination of income the following amounts are to be deducted, insofar as they are not already classified as deductible expenses in accordance with the provisions of the Income Tax Act:

1. (...)

2. (...)

3. (...)

4. (...)

12

5. Expenses for the promotion of charitable, church-related, religious, academic or public policy purposes and those for purposes of public benefit which are recognised as deserving of particular support in the amount of five per cent of the total amount of income or two per mille of the sum of the total turnover and the sum of the wages and salaries paid within the calendar year. For academic and scientific purposes, the percentage increases from five per cent by an additional five per cent. Income within the meaning of this provision is the income before the deduction of the expenses named in the first sentence and § 10d of the Income Tax Act.

13

On the basis of § 51(1) of the Income Tax Act 1955, the Federal Government, with the consent of the Bundesrat, more closely determined the scope of the deductible special expenses in § 49 of the Implementing Ordinance for the Income Tax Act 1955 (Einkommensteuer-Durchführungsverordnung 1955 – EStDV) of 21 December 1955 (BGBl. I p. 756):

§ 49

14

Promotion of public policy causes

15

Expenses for the promotion of public policy causes can be deducted only if

16

1. a) they are given to a political party which nominated at least one of the candidates elected in the last election to the Bundestag or a Land parliament or they are given to a political party of the Danish minority, and

17

b) the party’s Federal Management or the Land Management responsible for the receipt of the donation confirms that the requirements laid out in letter a are met and the donation will only be used for public policy purposes, or

18

2. hey are given to a legal person which in accordance with its by-laws and actual management exclusively serves public policy causes and the funds of which are used for the parties named in no. 1, and if the recipient confirms that the donation will be used only for the support of the parties named in no. 1, or

19

3. they are given to a legal person which in accordance with its by-laws and actual management exclusively serves general public policy causes, which are determined by the Federal Government with the consent of the Bundesrat. General public policy causes within the meaning of this provision are those which generally aim to promote the democratic state within the scope of application of the Basic Law and in Berlin (West); endeavours which only pursue particular public policy interests do not serve general public policy causes. The recipient of the donation must confirm that the amount received will solely be used for general public policy causes.

20

In accordance with the order of the Federal Constitutional Court of 21 February 1957 - 1 BvR 241/56 - (Decisions of the Federal Constitutional Court, Entscheidungen des Bundesverfassungsgerichts - BVerfGE 6, 273) Art. 1 no. 37 of the Second Ordinance Amending the Implementing Ordinance for the Income Tax Act (Zweite Verordnung zur Änderung der Einkommensteuer-Durchführungsverordnung) of 7 February 1958 (BGBl. I p. 70) deleted the following words from § 49 no. 1(a):

21

‘which nominated at least one of the candidates elected in the last election to the Bundestag or a Land parliament or they are given to a political party of the Danish minority’. This version of § 49 was adopted into the Implementing Ordinance for the Income Tax Act of 26 April 1958 (BGBl. I p. 306).

22

The Federal Government, with the consent of the Bundesrat, also inserted a provision of the same content as § 49 of the Implementing Ordinance for the Income Tax Act 1955 into § 26 of the Implementing Ordinance for the Corporation Tax Act (Körperschaftsteuer-Durchführungsverordnung - KStDV) of 23 December 1955 (Federal Law Gazette I p. 853) on the basis of § 23a(1) of the Corporation Tax Act in the version of 21 December 1954 (BGBl. I p. 467). […]

II.

23

1. The Land Government of Hesse applied for a declaration that:

24

a) § 10b of the Income Tax Act in the version of 21 December 1954 (BGBl. I p. 441), insofar as it concerns donations to political parties,

25

b) § 11 no. 5 of the Corporation Tax Act in the version of 21 December 1954 (BGBl. I p. 467), insofar as it concerns donations to political parties,

26

c) § 49 no. 1 and 2 of the Implementing Ordinance for the Income Tax Act of 21 December 1955 (BGBl. I p. 756),

27

d) § 26 no. 1 and 2 of the Implementing Ordinance for the Corporate Tax Act of 23 December 1955 (BGBl. I p. 853),

28

e) the Second Ordinance on the Deductibility of Donations for the Promotion of Public Policy Causes of 23 October 1956 (BGBl. I p. 836) violate Art. 3(1) in conjunction with Art. 20 and Art. 21(1) of the Basic Law (Grundgesetz - GG), the provisions under c), d), e) also violate Art. 21(1) fourth sentence of the Basic Law and are therefore void.

29-35

2. […]

III.

36

[…]

37

In accordance with § 77 of the Federal Constitutional Court Act (Bundesverfassungsgerichtsgesetz - BVerfGG), the Court gave the Bundestag, the Bundesrat, the Federal Government and the Governments of the Länder the opportunity to submit statements.

38

The Senate of the Free and Hanseatic City of Hamburg joined the submission of the Land Government of Hesse. The Land Government of North Rhine-Westphalia also joined the submission of the applicant.

IV.

39-47

[…]

V.

48

The Land Government of Hesse and the Federal Government were represented at the oral hearing on 13 May 1958. The Federal Constitutional Court left it to the discretion of the Christlich-Demokratische Union (CDU) and the Christlich-Soziale Union (CSU), the Sozialdemokratische Partei Deutschlands (SPD), the Freie Demokratische Partei (FDP), the Gesamtdeutscher Block (BHE) and the Deutsche Partei (DP) whether to send representatives to the oral hearing, who were to be given an opportunity to make a statement. The SPD made use of this opportunity by sending members of the Bundestag Professor Dr. Gülich and Seuffert. The FDP was represented by member of the Bundestag Dr. Bucher. The CDU and CSU, the BHE and the DP did not send representatives.

49

Professor Dr. Eschenburg of the University of Tübingen was heard as an expert ([…]).

B.-I.

50

1. The application is admissible in accordance with Art. 93(1) no. 2 of the Basic Law in conjunction with § 76 no. 1 of the Federal Constitutional Court Act. The applicant, a Land government, considers federal law to be void due to being substantively incompatible with the Basic Law.

51-54

2. […]

II.

55

The provisions under review here provide that donations to political parties are, up to a certain amount, deductible from taxable income as expenses for the promotion of public policy causes. Therefore, the provisions form part of the rules that govern the definition of income as the basis for calculating income and corporation taxes.

56

In accordance with Art. 105(2) no. 2 of the Basic Law, the Federation holds concurrent legislative power to regulate ‘taxes on income’ if the Federation claims these taxes wholly or in part to cover federal expenses. The power to legislate on taxes on income also gives the legislator the right, for particular reasons, to exclude certain expenses that technically amount to the use of income from the determination of the taxable income.

57

By declaring donations to political parties to be deductible, the federal legislator waives parts of the income and corporation taxes that would otherwise be payable on those amounts. The waiver benefits political parties. Thus, the recognition of party donations as deductible expenses means that the state indirectly participates in the funding of political parties in the amount of the taxes it foregoes.

58

In making use of this legislative power, the legislator is bound by overarching constitutional principles. The challenged provisions would therefore be incompatible with the Basic Law if the Basic Law prohibited all direct or indirect funding of political parties by the state, as the applicant claims. However, this is not the case.

59

Pursuant to Art. 21(1) first sentence of the Basic Law, the political parties participate in the formation of the political will of the people. They do this especially through their participation in elections. Current electoral law presupposes the existence of political parties for the preparing and conducting of elections. The political parties are therefore primarily election preparation organisations, and their financial means also first and foremost serve the preparation of elections. Due to the pivotal role that political parties play today throughout the constitutional state order, which becomes particularly apparent in elections, the Federal Constitutional Court recognised that they have the function of constitutional organs in the innermost part of the constitutional order and granted them the power to assert their rights in the electoral process by way of applications in Organstreit proceedings (disputes between constitutional organs) (BVerfGE 4, 27 <30>). As conducting elections is a public task, in respect of which the Constitution accords a decisive role to the political parties, it is permissible for the state to provide financial resources not only for the process of conducting elections, but also to the political parties whose existence is a necessary prerequisite for those elections.

III.

60

Nevertheless, § 10b Income Tax Act, § 11 no. 5 Corporation Tax Act, § 49 no. 1 and 2 of the Implementing Ordinance for the Income Tax Act and § 26 no. 1 and 2 of the Implementing Ordinance for the Corporation Tax Act violate the fundamental right of political parties to equal opportunities.

61

1. This fundamental right, derived from Art. 21(1) of the Basic Law, was first developed by the Federal Constitutional Court for the electoral process itself: The votes cast for the different political parties in a system of proportional representation must generally have the same impact on electoral success (BVerfGE 1, 208 <242, 255>; 6, 84 <90>). The applicability of the fundamental right to equal opportunities was expanded to include the preparation of elections (approval of nominations, signature quorums; cf. BVerfGE 3, 19 <26>; 3, 383 <393>; 4, 375 <387>).

62

The fundamental right to equal opportunities also applies to election advertising, which is indispensable in the preparation for elections in a mass democracy, to the extent that such advertising is influenced by acts of public authority (equal access to public broadcasters: BVerfGE 7, 99 <107>); it also applies to the competition of political parties for donations (BVerfGE 6, 273 <280>).

63

2. The challenged provisions provide that any taxpayer who is liable to pay income or corporation tax may make donations to any political party up to a certain amount, with the same legal effect of deductibility in the determination of their taxable income. On the basis of their wording, the provisions therefore give all political parties the same opportunities to obtain donations.

64

Even a law that avoids unequal treatment in its wording and describes its scope of application in abstract and general terms is contrary to the general guarantee of the right to equality if obvious inequalities arise from its practical effects and these unequal effects are caused by the legislative design. The decisive factor is not the external form of the law but its substantive content ([…]).

65

3. If the legislator intervenes through legal regulation, even if only indirectly, in the formation of the political will in a way that may impact the equality of opportunities of political parties, it must recognise that the scope of its discretion is especially narrow in this area. In principle, all political parties must be treated equally in formal terms.

66

This principle of formal equality prohibits any differential treatment between the political parties that is not justified by ‘compelling grounds’. This follows from the democratic-egalitarian foundation of our constitutional order (cf. on the equality of opportunities of political parties BVerfGE 1, 208 ff. <255>; 4, 375 ff. <382>; 6, 84 <94>; 6, 273 <280>).

67

Considering the large financial resources required by modern election campaigns, all political parties are dependent on donations nowadays; no political party can cover its entire funding needs, including the cost of election advertising, through membership contributions alone. In the democratic multi-party state, all political parties are equally called upon to participate in the formation of the political will of the people, be it as part of the government or as part of the opposition. It is true that the state is not required to create laws to ensure that the financial needs of political parties are met. However, if the legislator does create any laws with the effect of promoting the funding of political parties, this law must be constitutional and must not violate the fundamental right of political parties to equal opportunities. If the state does create legislative measures which serve the funding of political parties – either through the preferential tax treatment of donations, in the sense that taxes payable by the donors are waived, or through the direct provision of tax money for the work of political parties –, these rules may not lead to preferential treatment of any political party or group of political parties.

68

As the income tax rate increases as the amount of taxable income increases, up to a maximum rate of 53 per cent, and since the corporation tax rate is generally 45 per cent, the option of deducting donations to political parties in the determination of taxable income primarily becomes a motivating factor for those payers of income tax with large incomes and for those who are required to pay corporation tax. Under particular circumstances, this new law even allows these taxpayers to double the amount of their donation without having to increase the amount they pay out of their own pocket. On the other hand, for taxpayers with small incomes whose taxes are deducted from their wages, this deductibility of donations to a political party does not offer any additional incentive, as the donations they are capable of making are typically so small that they will not exceed the standard deduction for extraordinary expenses generally available for their tax rate.

69

Donations to a political party are habitually made with certain interests in mind. A political donation is usually made with a direct political or economic purpose, unlike a donation to charitable, religious or academic causes, which is usually motivated by the cause itself and made out of liberality and without the expectation of a specific advantage for the donor. The general tendency is that donors will only give money to those political parties whose platform and previous activity in Parliament and Government suggest that their policies will correspond to the donor’s particular interest. Of course, this fact can only be relevant where the political goals and methods of achieving them differ so significantly between (groups of) existing political parties, that a donor, wishing to safeguard their interests, must choose to support one or several political parties in particular and not to support others. Such differences do in fact exist among particular political parties in the Federal Republic; they are founded on historically different perspectives on the relationship between the individual, the state and society. Consequently, the provisions at issue have the effect that political parties whose platform and activity attracts wealthy societal groups will benefit to a greater degree. The legislator is not required to compensate existing factual differences in the competitive positions of political parties, which result from differences in their sociological structures. At the same time, the legislator is not permitted to create, without compelling grounds, provisions that aggravate existing factual inequalities in opportunities of political competition between the parties. However, the law at hand is set out in such a way that the contribution made by the state through its waiver of taxes increases the weight of certain political parties in the process of formation of political will. Although factual inequalities are a prerequisite of this aggravation of existing differences, the law in question exclusively caused this aggravation. The law thus creates differences in political weight among the political parties, which amounts to a violation of the formal principle of equal opportunities, as it is based on a criterion that is evidently irrelevant to the matter at hand. The practical effects of the law, despite treating all political parties the same in its wording, are that particular political parties disproportionately benefit from the opportunity to receive large donations and consequently expand their weight in the political power struggle without objective justification.

70

4. This result cannot be called into question with the objection that the principle of equal opportunities must consequently also apply to donations to charitable or academic institutions, churches etc. This conclusion is not imperative. The work of political parties manifests itself in the area of formation of the political will. Everyone is subjected to the product of this formation of will, namely the decision of the majority, including those who did not support the parties of the majority. As a result, a particularly high standard must be set here regarding the equality of opportunities. On the contrary, a member of a certain religious group that only receives a small amount of donations cannot run the risk of finding themselves in the sphere of influence of another religions group that receives larger donations. In areas that do not involve the formation of the political will or the exercise of political power, but instead concern the activities of societal powers and institutions, the principle of equal opportunities, as it has been developed for political parties in the context of the formation of the political will, does not apply. As a result, the fact that certain tax rules may benefit such institutions to different degrees cannot violate the Constitution.

IV.

71

The provisions of the Income Tax Act, the Corporation Tax Act and both Implementing Ordinances under review here also violate the fundamental right of citizens to equal treatment.

72

1. A citizen who donates money to a political party thereby generally commits themselves to the goals of that political party, in a way that is similar to giving their vote to this party. Thus, they make use of their right of participation in the formation of the political will. In a living democracy, this right is not only expressed in the process of voting during elections, but also through influencing the continual process of formation of political opinion. As a result, a strictly formal interpretation of the general guarantee of the right to equality is necessary not only in the narrow context of electoral law, but also in this prior process of formation of the political will. The legislator is not required to mitigate existing, differing opportunities to influence this process. If, however, the legislator does create laws that create particular opportunities for individuals to influence this process, this may not lead to a differentiation that privileges citizens of greater financial means.

73

2. In contrast, the formally equal treatment of rich and poor in the area of tax law through the application of the same tax rate would violate the general guarantee of the right to equality. In this regard, justice requires that effect be given to a proportionate equality, where those with greater ability to pay must pay a larger percentage of their income as tax than those with less ability to pay (cf. Art. 134 of the Weimar Constitution, Weimarer Reichsverfassung – WRV).

74

3. The democratic order established by the Basic Law has a formal nature insofar as it fundamentally values all citizens as absolutely equal in the context of the formation of the political will, irrespective of existing social differences. This principle may be set aside only where imperative reasons require it. For example, the Court found that the threshold created by electoral law, requiring a political party to acquire at least five per cent of the total vote [in order to gain seats in Parliament], was permissible to safeguard a functioning government.

75

The principle of progressive taxation has the effect that those citizens who make use of their democratic right of participation in the formation of the political will through donations to political parties make different material gains as taxpayers through these donations. As this money plays a significant role in the preparation for elections, and since a political party which has access to large funds may be able to advertise more effectively than a party with more limited financial resources, a donor with a higher income can give their political opinion larger advertising power, thus increasing their political influence, compared to a donor with a lower income. As donations to political parties lead to greater savings in taxes in both absolute and relative terms for those with a higher income compared to those with a lower income, the political opinion of the former is, to a certain extent, rewarded. Such different tax treatment created by law of the influence on the formation of the political will based on the level of income is incompatible with the principle of formal equality, which governs the exercise of political rights in a free democracy.

V.

76-78

[…]

C.

79

1. As § 10b Income Tax Act and § 11 no. 5 Corporation Tax Act only violate the Basic Law insofar as they provide for tax benefits for donations to political parties, but not insofar as they provide this advantage for donations for the promotion of other public policy causes, they were declared void with a limitation to that effect.

80

By contrast, § 49 no. 1 and 2 of the Implementing Ordinance for the Income Tax Act and § 26 no. 1 and 2 of the Implementing Ordinance for the Corporation Tax Act concern only donations to political parties. Therefore, these provisions had to be declared void in their entirety.

81

2. The aforesaid means that donations made to a legal person for general public policy causes in accordance with § 49 no. 3 of the Implementing Ordinance for the Income Tax Act or § 26 no. 3 of the Implementing Ordinance for the Corporation Tax Act may not, either directly or indirectly, benefit political parties.

82

3. Insofar as legal provisions are declared void, this voidness applies retroactively from the time of their initial entry into force. As both the Income Tax Act and the Corporation Tax Act and the Implementing Ordinances issued in conjunction with them have been amended and promulgated several times since the Law on the Reorganisation of Taxes of 16 December 1954 came into force and were applicable in those respective versions to different periods of assessment, all these versions are to be declared void in the interest of clarity. Whether and to what extent the tax benefits provided by the provisions now declared void can be granted to those taxpayers who donated to a political party prior to the pronouncement of this judgment with the legitimate expectation that these provisions were valid must be determined by the tax administration within the scope of its responsibility.