Experts Urge German Chancellor's CDU Not To Cut Taxes

by Ulrika Lomas, Tax-News.com, Brussels

08 May 2009

With September’s elections looming, Germany’s ruling Christian Democratic Union party (CDU) remains deeply divided on tax policy. Despite warnings from key economic advisors, the party’s leadership is still considering Chancellor Angela Merkel’s proposal to firmly embed tax cuts at the heart of its election programme, and Bavarian sister party the Christian Social Union (CSU) – in full support of the Chancellor – remains determined to press ahead with an election promise of quick tax cuts. Others within the party have, however, expressed their renewed opposition to the Chancellor’s proposal.

President of the Kiel Institute for the World Economy Dennis Snower is among a group of leading economists who have recently warned of insufficient scope to implement any significant tax reductions – either now or in the foreseeable future. According to Snower, given that the amount of debt will rise over the course of the next few years, the question is whether the debt is settled quickly, through the introduction of higher taxes, or whether the bill – plus interest – is settled at a later date.

Chairman of the German government’s board of advisors Wolfgang Franz has also expressed his scepticism regarding the financing of any proposed tax cuts. Franz, who is also Head of the Centre for Economic Research in Mannheim, is convinced that, rather than implementing further tax cuts, new debt must be curbed, either through spending cuts or tax increases.

Yet despite these, and other, warnings, Chancellor Merkel defended her plans for tax cuts earlier this week, alluding to the particular difficulties faced by the middle classes as a result of the economic crisis. Maintaining that tax cuts are unavoidable, the Chancellor has proposed a series of tax reductions designed to support the middle classes, although has, as yet, not confirmed figures.

Party Chairman Volker Kauder also remains adamant that the tax burden must be reduced for low- and middle-income earners in the next legislative period, to be achieved by correcting “die kalte Progression” (fiscal drift) – a phenomenon whereby monetary depreciation coupled with unchanged taxes has meant that a larger proportion of tax is levied on high earners.

The Union is due to present its tax proposals, together with its election programme, at the end of June, three months before the election.

Recommended