Germany's FDP Advocates Lower Subsidies To Finance Tax Cuts

by Ulrika Lomas, Tax-News.com, Brussels

11 November 2009

As Germany’s newly elected Coalition government proudly unveils details of their initial tax cut plans, the Free Democratic Party’s (FDP) budgetary expert Otto Fricke has advocated a gradual reduction in state subsidies as a means of financing the ambitious proposals.

Fricke is convinced that a progressive reduction of state subsidies will enable the government to fund the tax initiatives contained in its new growth acceleration law (Wachstumsbeschleunigungsgesetz). According to Fricke, although a structural reform of the country’s taxation and social security systems is required, government expenditure must also be urgently reviewed.

Meanwhile, the Federation of German Wholesale and Foreign Trade (BGA) has fiercely criticized the government’s decision to reduce the rate of value-added tax (VAT) in the hotel industry.

BGA Vice President Hans Fabian Kruse has vehemently opposed the initiative, convinced that it merely emits the wrong signal, and serves to distort competition. According to Kruse, the move will neither create jobs within the industry nor will it help to achieve other labor market objectives. Instead of introducing measures designed to benefit specific sectors, Kruse is calling for a fundamental simplification of the existing tax system.

From January 2010, the government has agreed to reduce the tax burden on parents, businesses, heirs and the hotel industry, by around EUR8.5bn each year.

In a bid to support tourism, and bowing to pressure from the Christian Social Union, the government agreed to allow the hotel industry to benefit from the reduced VAT rate of 7% instead of the standard rate of 19%. According to a recent opinion poll, however, many hoteliers are only intending to pass on a fraction of the tax benefit to their guests.

The proposed measure is set to result in a loss in tax revenue for the government estimated at around EUR1bn.

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