Hot Air or Higher Prices? | Business| Economy and finance news from a German perspective | DW | 08.06.2005
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Hot Air or Higher Prices?

Politicians generally shy away from talking about raising taxes ahead of an election. But as Germany heads toward an early vote this fall, talk about hiking the country's Value Added Tax (VAT) is making the rounds.


A VAT hike on the way? Better get that David Hasselhoff CD now

The prospect must be extremely seductive German politicians faced with an ever-widening budget deficit: Currently, Germany's 16 percent VAT, a general consumption tax on goods and services, filled the government's coffers last year with 140 billion euros ($171 billion). By raising it only one percentage point, another 8 billion euros would head towards the treasury.

At the same time, social security costs on workers' wages could be cut in an effort to lower Germany's rather high labor costs. Ideally, that would let Germany follow the example of Scandinavian nations that have solid economic growth and lower unemployment.

Germany's VAT is currently under the European average. Denmark, Sweden and Hungary are at the high end with 25 percent and only tiny Luxembourg and Cyprus charge less at 15 percent.

Regardless of the international comparison, Germans are still likely uneager to see the VAT raised in the near future. But that doesn't bother Christian Democratic MP Steffen Kampeter. "Now isn't the time to make gifts," he said, adding that politicians needed to come clean with voters before the election and tell that things can't continue on as they are.

Scaring voters?

Bildgalrie Angela Merkel Zusatzbild

Angela Merkel

Conservative governors from several German states have even started to openly discuss raising the VAT by up to four percentage points. The national leadership of Christian Democrats (CDU), however, continues to play its cards closer to the chest. Both the conservative chancellor candidate Angela Merkel and CDU Secretary-General Volker Kauder fear voters could be scared off by a premature debate about tax hikes. But they have refused to rule out the possibility of raising the VAT and Kauder has repeatedly said the conservatives will take a holistic view of what the country needs.

The ruling center-let coalition of Social Democrats (SPD) and Greens, sensing a possible weakness, have gone on the attack over the conservatives' tax talk. Joachim Poß, deputy parliamentary leader for the SPD, said average Germans will be the losers. "Hike the VAT, slash the tax write-offs for workers and then cut the highest tax rate for the privileged few -- that's what will happen if the CDU/CSU and FDP win early elections," he said.

But it wouldn't be quite that simply. Although the SPD and Greens overwhelmingly oppose raising the VAT -- which started out at 10 percent in 1968 -- the CDU and the smaller free market Free Democrats (FDP) are divided over the matter.

Liberals oppose hike

55.Parteitag der FDP in Dresden: Guido Westerwelle

Guido Westerwelle

The FDP has long pleaded for a radical tax reform. But according to the FDP finance expert Ludwig Thiele, the goal has to be an overall lowering of the tax burden in Germany. And FDP leader Guido Westerwelle has repeatedly said the liberals would not support raising the VAT.

Most politicians in Germany agree Germany, which has one of the most complicated tax systems in the world, could use a major tax reform. "We need a serious structural modernization of the tax code," said CDU tax expert Peter Rzepka, adding a "grand vision" could help the country's mood and strengthen its efforts to spark growth.

However, the big question is how any tax reform might be paid for -- and that's something few people agree upon. Not even all the conservatives, the main supporters of a VAT hike, believe any hike will finance itself.

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