Read Merkel's Lips: 'No New Taxes'

by Ulrika Lomas, Tax-News.com, Brussels

23 August 2006

German leader Angela Merkel has assured taxpayers that there will be no more increases in taxation other than the planned increases in value-added tax and income tax from January 2007.

"I view tax increases as the wrong signal," Merkel told a press conference earlier this week, as economic data showed that the German economy is at long last growing again.

VAT is due to be increased from 16% to 19% from January 1 in order to help reduce the government's budget deficit and meet European Union rules underpinning the stability of the euro currency.

However, critics of the VAT hike have warned that the move threatens to snuff out early signs of a recovery in Europe's largest economy, which has been stuck in the doldrums for a number of years.

Calls for a reversal of the VAT hike policy have increased in the past week, after Finance Ministry figures showed that federal and state tax revenues rose by 11.5% year-on-year in July, led by a strong increase in VAT revenues. This increase took the annual gain in taxes for the first seven months of 2006 to 8.1%.

However, Merkel refused to be moved on the issue: "Nothing will be changed with VAT," she asserted.

The increase in the rate of VAT will coincide with a number of other tax increases and cuts in tax breaks as the grand coalition attempts to dig itself out of its fiscal hole. These include: a 3% 'wealth tax' on individuals earning more than EUR250,000 a year (US$316,000), and couples earning more than EUR500,000, driving the top rate of income tax to 45%; and the elimination of tax breaks for commuters in a tax package designed to raise an additional EUR18 billion.

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