Angela Merkel's CDU Will Raise VAT By 2%

by Ulrika Lomas, Tax-News.com, Brussels

11 July 2005

Germany's opposition Christian Democrats are due to launch their election platform today, but it emerged over the weekend that they plan to cut state unemployment insurance contributions from 6.5% to 4.5% of workers' pay, recouping the lost revenue with an increase in VAT from 16% to 18%.

Subject to agreement from Germany's president, Horst Koehler, an election is due to be held in October, and the polls are predicting an easy victory for Angela Merkel's CDU and sister party CSU under Edmund Stoiber.

The CDU expects the VAT increase to generate EUR16bn in extra revenue; but the Finance Ministry says that dampened consumer demand would hold back the additional revenue to just EUR13bn.

The opposition parties are also expected to abolish tax breaks for first-time homeowners. It's also likely that a conservative administration would go ahead with corporate tax cuts already planned by Chancellor Schroeder's government. The package is worth around EUR5.3billion and would cut the basic rate of corporate tax to 19% from 25%, reducing the average tax burden on business to 32.7% from 38.7%.

The corporate tax proposals have been becalmed in Parliament because the CDU objects to the Social Democrat's plan to offset the lost revenues by hiking dividend tax to 63% from 50%.

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