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Taxpayers demand end to eastern German tax subsidies

Jefferson Chase
November 9, 2017

As Germany negotiates a new government, pressure is growing to ax a tax for special economic aid to the formerly communist East. Are Germans tired of paying reunification costs, even as the eastern economy lags behind?

Symbol of solidarity supplement
Image: picture-alliance/dpa

28 years after the Berlin Wall fell on November 9, 1989, Germany's Association of Taxpayers marked the occasion by officially premiering a campaign to discontinue the so-called "solidarity surcharge," an add-on tax instituted in the early 1990s as a temporary measure aimed at helping the formerly communist East catch up with the West.

Nicknamed "Soli," the surcharge levies an additional 5.5 percent income tax after a certain level of earnings. In 2016, its revenue totaled almost €17 billion ($19.7 billion). Polls indicate that up to 80 percent of Germans feel they've been paid enough to this end and want the three-party coalition government currently being negotiated in Berlin to scrap the levy.

Most Germans believe that the money from the Soli is channeled directly into economic support for eastern Germany, but things aren't that simple. These revenues actually flow into the general government budget. Meanwhile, the government has doled out aid to the East but through a two-part program called the Solidarity Pact. Since 2011, the Soli has taken in more money than the pact has paid out. That's one reason critics say the surcharge should go.

Chart revenues versus expenditures for economic solidarity  ENG
The government now takes in far more money for economic solidarity than it pays out

"The people think that they pay the [Soli] supplement particularly to help eastern Germany, but we now know that these two things, technically, aren't connected," Association of Taxpayers President Reiner Holznagel told Deutsche Welle. He says that more than a quarter of a century after German reunification, the government should "keep its word" that the surcharge would only apply as long as necessary. But it remains debatable whether the Soli has achieved its main goal.

Money can't buy economic parity

After a final injection of €3.6 billion to eastern Germany, the Solidarity Pact will expire in 2019. That's when the creators of the legislation thought the region would reach economic parity with its former West German counterpart. The reality is that the former communist East still lags dramatically behind.

Despite €343 billion in post-reunification earmarked assistance, the six eastern federal states' economic volume is only around 72 percent of that in the West. Unemployment is higher, wages are lower, and with the exception of some flourishing cities like Dresden and Leipzig, the population is dwindling and aging.

The government's special commissioner for eastern German affairs, Iris Gleicke, rightly points out that the Solidarity Pact's targeted economic help for the formerly communist part of the country has led to the restoration of inner cities, the promotion of top-class universities and a healthy mid-sized industry sector. But it hasn't made eastern Germany able to compete on equal footing with western Germany.

"Not one company listed on the DAX [the German stock exchange] has its headquarters in eastern Germany, and there's a lack of corporations and major enterprises with effective research divisions," Gleicke told DW. "The causes are many, and we can't change that overnight. Self-supporting structures have yet to be developed."

If the problem is clear, the causes are less so. Why did the Solidarity Pact come up so short of its goals? That's what many German taxpayers want to know.

Misplaced investments 

Autobahn A20
Critics say some eastern projects, such as the A20 Autobahn, were unnecessaryImage: dpa

Gleicke bristles at what she calls the narrow-minded "bean counting" of many pact critics. At the same time there is broad consensus from politicians to academics to local chambers of commerce that the money earmarked for jump-starting eastern Germany too often failed to rev up economic motors.

An oft-cited example of misdirected funds is the "white elephant" autobahn A20 in the northeast German state of Mecklenburg-West Pommerania. Constructed in the 1990s, it serves half the amount of traffic as originally envisioned.

Holznagel, who himself was born in the region's city of Pasewalk, says that investments need to be restricted to areas where eastern communities have a realistic chance of success. His cites his state's uncompetitive shipping industry as another example of such misplaced investment. 

The taxpayer association president worries that direct government subsidies may have encouraged an initiative-killing culture of dependence among eastern Germans, and that cash-strapped local municipalities may have used funds intended for infrastructure to plug holes in their budgets instead.

Berthold Wigger, Professor of Finance and Public Management at the Karlsruhe Institute of Technology, also thinks that part of the problem behind eastern Germany's limping economy is that the way the subsidies are doled out does little to account for the hard facts of the region's demographics.

"The populace is simply older," he told DW. "You can't get this problem under control by creating more industrial parks."

Wigger argues that Germany needs to accept that people are leaving eastern Germany and migrating from rural areas and small towns to cities within it. He calls for a paradigm shift: away from thinking in terms of broad, set regions and toward considering the needs of people who may need or want to be mobile.

"Politics should have more of an eye for the people of Cottbus," he says, using the example of the medium-sized city near Germany's Polish border. "And less of an eye for Cottbus — independent of Cottbussers."

Where eastern Germany goes from here

Poorer communities in western Germany, particularly in the former industrial heartland of the Ruhr Valley, have complained for years about having to pay for developmental aid in the East when they too need assistance. Regardless of what happens with the Soli, that complaint will become obsolete when the Solidarity Pact expires in 2019. The poorer East will still receive plenty of assistance from the central government, but it will have to compete with needy western German communities for that help. 

Wigger argues that scrapping the solidarity surcharge would help usher in a period of growth by freeing up money for potential investment. That sounds a bit like Ronald Reagan-esque trickle-down economics, hardly a very popular stance in Germany. But many local business leaders in the East favor the idea. The chamber of commerce in the eastern state of Mecklenburg-Western Pomerania, for instance, says getting rid of the tax would be "a correct step." And they're not alone.

"Since all working people, including those in the eastern German states, pay the supplement out of their gross wages, getting rid of it would probably release more money for consumption," Robert Radzimanowski, head of economic policy at the eastern Brandenburg chamber of commerce, told DW. "That money could also benefit the region economically."

Eastern German business leaders also broadly agree that they want the federal government to focus on investing in education and on improving Germany's mediocre digital infrastructure. Those were two campaign promises of the small-government, business-friendly Free Democratic Party (FDP) during this year's election. The FDP has also called for an immediate end to the Soli.

The FDP is currently negotiating the formation of a new government with both Chancellor Angela Merkel's conservatives and the Greens. The results of those negotiations will have major implications not only on how much money from their paychecks German taxpayers get to keep in future, but whether the East of the country makes any further progress catching up with the West.

How much did reunification cost?