Tax Cuts Are The Issue In The German Election

by Ulrika Lomas, Tax-News.com, Brussels

24 August 2009

Recent OECD statistics showing the German working man to be more heavily taxed than many of his OECD counterparts, made a big impact in the German press. With a month to go till the Bundestag elections, which party is going to tell the German electorate that they do not deserve tax cuts?

The German Free Democrats (FDP), as the third party that often wields the balance of power between the two main parties, but never full responsibility for government, has set the tone on tax cuts to which the main parties must respond. Its leader, Guido Westerwelle, has made a speech celebrating the Party's sixtieth anniversary in which he demanded a radical reform of the tax system, appealing directly to the middle classes and the medium sized enterprises, who, he claimed, were responsible for 70% of all job creation, and 80% of all apprenticeships. "Our objective is a simplified tax system with fair tax rates for everyone," he said. "Tax policy is a question of justice and it determines how our society hangs together. If the middle class is allowed to wither through yet higher taxes and social expenses, then jobs are in danger".

The FDP has already dismissed the idea of coalition with the Social Democrats (SPD) and predicates any joining together with the Christian Democrats (Union) on tax policy. The appeal to the middle classes tacitly acknowledges the pressure being put on the entrepreneurial class as the present government aggressively pursues the flight of untaxed assets to other financial centres. The FDP propose simplified and significantly reduced rates of income tax and a program of 400 spending cuts. Westerwelle said that it only required that 20% of the 'black economy' became regularized for the state budget to be balanced.

Angela Merkel and her Union of Christian Democrats has a huge lead in the polls and wants to say as little as possible on the subject of tax to spoil it. Her young Economics Minister, Karl-Theodor zu Guttenberg, produced a paper in July on tax policy which was leaked to the press and described by the Financial Times as the 'one' (and only) interesting paper on tax. The paper recommended corporate tax cuts, a review of uncompetitive sectoral minimum wages and various measures aimed at reducing employers' costs and red tape. However it also suggested an increase in VAT which caused the most controversy and led to the disavowal of the paper by both Merkel and her protege, Guttenberg. Now the SPD have resorted to publishing on 'youtube' a TV interview with Merkel as she tries to answer whether it is her intention to increase the VAT rate - 'Did you understand her answer?' ask the SPD. Unable, not to counter the FDP tax cut proposals, the Union are proposing modest cuts to the lowest income tax rates from 14% to 12%, and a raising of the threshold to the highest tax rates - the Union manifesto echoes the FDP in stating that taxes should be 'simple, low and fair'.

The SPD politician and present finance minister, Peer Steinbrueck, describes the other parties' attempts at claiming a tax-cutting program as 'absurd' and unworkable given the economic circumstances. This did not stop the SPD from proposing its own income tax rate cuts at the lowest level balanced by loading on the income tax at the highest level and tax increases on such things as stock exchange dealings. However they claim to be the party that recognize the realities of the present economic crisis. After balancing the budget in 2008, there will be an expected deficit of 4.7% of GDP in 2009, rising to 6% in 2010 and total public debt could reach 84% of GDP. The German central bank has already dismissed the possibility of tax cuts publicly and, as a member of the Eurozone, Germany has commitments to maintain deficits no higher than 3% of GDP. Furthermore there is now a constitutional commitment for the federal government to reduce its deficit to 0.35% of GDP by 2016, whilst the states must bring their deficits down by 2020.

Recommended