Plan to Raise VAT Would Fuel Inflation | Business| Economy and finance news from a German perspective | DW | 12.07.2005
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Plan to Raise VAT Would Fuel Inflation

Proposals by the German opposition CDU/CSU parties to raise value-added tax if they win the upcoming general election would raise inflation in the euro zone's biggest economy, the federal statistics office, Destatis, said on Tuesday. Responding to numerous enquiries about the possible effects of an increase in VAT -- a form of sales tax -- on consumer prices, Destatis said it had calculated that a two-percentage-point increase of VAT to 18 percent would boost the German consumer price index by 0.9 percentage point. Inflation in Germany stood at 1.9 percent in June, just below the European Central Bank's ceiling of 2.0 percent. Any prolonged breach of the 2.0-percent mark could persuade the ECB to raise interest rates, a move that could throttle the ailing economic recovery. The Christian Union CDU/CSU parties unveiled the economic details of their election campaign on Monday, with plans to raise VAT to 18 percent from 16 percent at present among the most prominent proposals. In exchange, unemployment insurance contributions would fall to 4.5 percent from 6.5 percent, making it cheaper for companies to hire new staff in a country where labor costs are notoriously high.

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