Tax plans dominate German election campaign | Business| Economy and finance news from a German perspective | DW | 24.09.2009
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Tax plans dominate German election campaign

Just days before national elections, tax reform has become one of the central economic battleground issues between Germany's political parties. So what are the parties' tax plans and how realistic are their proposals?

German tax returns

The top tax rate in Germany is 45 percent, but many politicians want that to change

Germans pay more of their income in taxes and social contributions than almost anywhere else in the world, according to data from the Organization for Economic Cooperation and Development. Top tax rates reach 45 percent and mandatory pension and health contributions raise the total even higher.

The right: how low can we go?

Political parties on the right have seized upon the tax system's complexity and high rates as a campaign issue. Chancellor Angela Merkel's Christian Democrats (CDU) have argued if voters re-elect them and add the pro-business Free Democratic Party (FDP) to their coalition, then they will cut taxes and simplify the system, boosting future growth.

But all three parties on the right are divided on how best to move forward with their tax cutting plans if elected. The CDU has generally expressed more caution, supporting a modest drop in the bottom income tax rates from 14 to 12 percent with no set timetable. But with the CDU's poll numbers falling in recent weeks, the party has come under pressure from its conservative Bavarian sister, the Christian Social Union (CSU), which wants to make a stronger tax-cutting gesture.

"I won't sign a coalition agreement that doesn't include tax cuts in 2011 and 2012," declared CSU head Horst Seehofer in an interview with the Muenchner Merkur newspaper published Wednesday. His party also wants to reduce the value-added tax, currently 19 percent, for some services, such as those provided by the hospitality industry.

Worker putting up billboard for the Left Party

The Left Party wants to "tax the rich" and raise top income tax rates to 53 percent

The liberal FDP, on the other hand, wants to do away with the current tax system entirely. Nicknamed the "beer-coaster system" for the size of the tax return forms Germans would have to fill out, the new tax code proposed by FDP head Guido Westerwelle would replace the current graduated system with three rates of 10, 25 and 35 percent based on income.

The party argues that the lower tax rates could actually increase tax revenues by pulling some work from the black market back into the legal economy and by spurring greater investment. But some outside estimates suggest such a tax system would actually reduce government revenue by 35 billion euros annually.

"I think it's very unrealistic that such tax rates will be implemented," said Michael Braeuning, an economist at the Hamburg Institute of International Economics (HWWI). Braeuning told Deutsche Welle that having enacted expensive stimulus measures in the past year, no future government can afford to forsake that much revenue.

The left: how much higher should we go?

On the other side of tax debate are the three parties of the left, which differ on details but generally favor tax increases. Merkel's current coalition partner, the center-left Social Democratic Party (SPD) has said it also plans to cut the bottom income tax rate, though it wants the rate reduced to 10 percent compared to the CDU/CSU's proposal of a 12 percent rate.

To pay for that cut and to fund more education programs, the SPD says it would bump the top rate up to 47 percent. By doing so, the Social Democrats have positioned themselves as the party of fiscal responsibility.

"There is no room for the tax cuts that others are promising," the SPD candidate for chancellor, Frank-Walter Steinmeier, said in an interview this week with public broadcaster NDR.

By raising rates on higher-income earners, economist Victor Steiner at the German Institute for Economic Research (DIW) says the SPD's plans could wind up raising more than enough revenue to pay for tax cuts for workers earning modest wages.

"In the lower income brackets, hardly any tax is paid; income tax payments are heavily concentrated on the upper income areas," Steiner told Deutsche Welle.

The environmental Green Party and the post-communist Left Party also reject tax cuts. Renate Kuenast, one of the Greens' top leaders, said Wednesday that the FDP's tax plans were a "declaration of war on future generations and all people who rely on the support of the state."

Borrowing from the United States, the Greens want to tax the income of all German citizens living abroad. Currently, only those living in Germany pay German taxes. But with both the Greens and the Left Party highly unlikely to enter government, their tax proposals are "an academic and theoretical exercise," said the DIW's Steiner.

FDP head Guido Westerwelle

FDP head Guido Westerwelle wants to drastically overhaul Germany's tax system

Both the Greens and the Left party have proposed taxes on stock market transactions as a source of new revenue and as a means of curbing what they say were some of the excesses that led to the market crash and recession.

The Left party has capitalized on the anti-market sentiments of the day with campaign placards that declare "Tax the Rich." The party also proposes raising the top income tax rate to 53 percent for people who earn over 65,000 euros a year.

Much ado about nothing?

Compounding the philosophical differences between the left and the right of German politics is the cold reality of a large budget deficit and a newly-enacted constitutional amendment known as the "debt brake" which will limit the ability of future federal and state governments to accumulate new debt.

Major tax cuts would be "difficult, if not ambitious," given the government's large budget deficit - which is expected to reach 86 billion euros next year - and uncertainty surrounding the robustness of the economic recovery, said Thiess Buettner, the head of public finance research for Munich's Ifo Economic Research Institute.

"The budget situation is difficult, and given the desire by most Germans to reduce the deficit, the margin for tax cuts is small," Buettner said in an interview with Deutsche Welle.

HWWI's Braeuning said that while tax cuts were unlikely, he imagined that a new government could still tackle the tax code.

"More possible is that we'll see a renovation of the tax system," Braeuning told Deutsche Welle. He envisioned changes that could flatten the tax rate and increase consumption and energy taxes in order to broaden the tax base and reduce the burden on some taxpayers.

Germany's national debt clock in Berlin

With the national debt growing rapidly, some economists say tax cuts aren't feasible

Although many Germans gripe about high taxes and ingeniously find ways to use every loophole in the system, they're not expecting politicians to deliver on promises of a tax cut. A survey by Wirtschaftswoche magazine in July revealed that 52 percent of voters thought the government couldn't afford to cut taxes , while 64 percent of those polled thought their taxes would rise next year.

Author: Brett Neely
Editor: Sam Edmonds