According to reports, German Chancellor Gerhard Schroeder recently rejected a proposal by his Finance Minister Hans Eichel, to increase the rate of VAT in order to help bolster the government’s flagging tax revenues and ease non-wage labour costs.
At a meeting with Schroeder and Social Democratic Party chairman Franz Muntefering in the chancellery last week , Eichel apparently mooted a plan to raise value added tax by up to 5% from its current level of 16%. However, it was reported that both Schroeder and Muntefering rejected the proposal.
According to estimates by the Finance Ministry, a 5% rise in VAT to 21% would generate additional tax revenues of EUR45 billion, enough to keep the government’s budget deficit below the European threshold of 3% of GDP.
In addition, Eichel intended to earmark surplus funds from a rise in VAT rates to reduce unemployment insurance contributions and to lower non-wage labour costs to below 40%, a move which many economists have suggested would help improve Germany’s overall competitiveness.
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