German Economics Institute Advocates VAT Increase

by Ulrika Lomas, Tax-News.com, Brussels

04 June 2009

Klaus Zimmermann, President of the ‘Deutsche Institut für Wirtschaftsforschung’, the largest economics research institute in Germany, has revealed that, while hugely unpopular, an increase in value added tax (VAT) is essential in order to reduce crippling State debt.

According to Zimmermann, tax rises will be unavoidable after the September elections, given the dramatic losses in tax revenue for the government, coupled with additional spending commitments, including two government stimulus packages and numerous support measures pledged for banks and businesses.

Announcing a 6% rise in VAT from 2011 to 25%, would, Zimmermann maintains, have a profound effect since VAT has a wide tax base, it affects imports, and as the announcement would also significantly boost consumption, would thus kick-start the economy.

However, while acknowledging that a rise in VAT would adversely affect low-income earners, Zimmermann has also urged that social security contributions be reduced as a counter measure.

Emphasising that low-income earners are already overburdened with excessive contribution payments, Zimmermann cited the example of Scandinavian countries, which successfully finance their welfare state through indirect taxes.

The German expert’s remarks have, nevertheless, been met with fierce opposition from the Christian Social Union (CSU), the Free Democratic Party (FDP), and also from trade unions. According to CSU Chairman Horst Seehofer, taxes must be reduced rather than increased, since raising taxes in order to support the economy merely emits the wrong signal. The FDP also pledged its support of tax reductions during a recent party conference.

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