Germany Divided Over Tax Rises

by Ulrika Lomas, Tax-News.com, Brussels

02 June 2010

In Germany the tide has turned, and, with tax cuts seemingly off the agenda, the focus of the debate has now switched to the issue of possible tax rises, sparking yet further disagreement among members of the coalition.

Germany’s Finance Minister Wolfgang Schäuble is currently on a collision course with Economy Minister Rainer Brüderle. Ahead of a key meeting to discuss the corner points of the 2011 budget and the 2014 financial plan, due to take place at the chancellery on June 6 and 7, Schäuble is paving the way for significant savings – and already intimating at the possibility of higher levies.

In stark contrast, however, Economy Minister Rainer Brüderle has categorically ruled out the idea of tax rises, reiterating that the overall aim remains, as before, to reduce taxes. The Free Democratic Party (FDP) is not distancing itself from plans to simplify taxation or to cut taxes, he emphasized, adding that the decisive aim is to significantly reduce the tax burden on individuals in Germany in this legislative period.

FDP leader Guido Westerwelle has also rejected the idea of a rise in value-added tax (VAT) stating that such a policy of permanently increasing the tax burden on individuals will not be achieved with the FDP. The standard rate of VAT was raised from 16% to 19% only three years ago under the former grand coalition government.

The FDP's budgetary expert, Otto Fricke, has, however, expressed his belief that, given the urgent need to save, the highly controversial tax break accorded to the hotel industry in Germany should be reviewed. As a result of increasing pressure from the FDP and the Christian Social Union (CSU), a reduced 7% VAT rate was granted to the sector for overnight accommodation at the beginning of the year. The decision was fiercely criticized from the outset by many, and simply hailed as an “election gift,” as it costs the state around EUR1bn a year.

Horst Seehofer, leader of the CSU, has expressed his fierce opposition to the idea of any increases in levies or contributions, arguing that this goes against the philosophy of the coalition agreement, and warning that there will not be rises in taxation with the CSU, with the exception of the transactions tax.

Both the Social Democrats (SPD) and the Green Party have urged the government to raise taxes as part of budgetary consolidation, with both parties calling for a rise in the top rate of tax and for an increase in wealth tax.

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