Germany's Coalition Groups Divided Over Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

12 October 2009

Germany’s newly elected Coalition partners, the Union party and the Free Democratic Party (FDP), have continued their discussions over future tax policy, with the stark realisation that financial constraints will now inevitably play a pivotal role in determining the outcome.

In a rare display of rationality, representatives of the right-wing Union party have rejected the radical tax cut plans of the liberal FDP party. According to Bayern’s Finance Minister Georg Fahrenschon, the proposals are simply not “realistic” at present. Before discussing future financial possibilities, he added, the parties must first go back to basics and draw up an initial balance sheet in order to gain a true picture of the country’s finances.

Although both political parties had attracted voters during their recent election campaign with the lure of tax cuts, the FDP’s radical tax concept, which aims to reduce the burden on taxpayers by around EUR35bn, is now proving a step too far for the rather more cautious Union party.

Indeed, the Christian Democratic Union’s (CDU) budget expert Steffen Kampeter has also recently emphasised the need to consider the already overstretched budgetary situation, before then evaluating the scope to implement tax reductions. Nevertheless, Kampeter remains eager to progress the Union party’s key aim, which is to alleviate the existing tax burden on individuals by reducing fiscal drift (kalte Progression).

Given the recent announcement from the European Commission that it intends to initiate deficit proceedings against Germany, the situation has gone from bad to worse for the FDP, limiting the already narrow scope for tax reductions yet further. As a next step, the European Union now plans to issue a recommendation outlining a precise timeframe for the government to correct its deficit.

The future government’s only hope for implementing the tax reductions that it so desperately seeks, rests on the extent to which the country’s economy has improved. A prognosis will be presented to the negotiators on October 21.

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