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The “Car Chancellor” Loses Some of His Sheen

November 25, 2002

Already under fire for raising taxes, Chancellor Schröder is facing new criticism from his one-time allies in the automotive industry. They warn that proposed tax hikes on company cars could cost thousands of jobs.

Bumpy ride - Chancellor Schröder has raised hackles in the car industryImage: AP

The German auto industry’s love affair with Gerhard Schröder has screeched to a halt in the wake of announced plans by the Chancellor’s governing coalition to raise taxes on the private use of company cars by 50 percent.

“That not only affects the driver, but influences sales and jobs in the German automobile industry—in a negative way,” Wendelin Wiedeking, head of Porsche, said in a newspaper interview.

According to the Association of the German Automotive Industry (VDA), some two million drivers of company cars will be affected by the tax hike, which will tax privately used company cars by 1.5 percent of the list price in the future. The current rate is one percent.

According to the VDA, some 500,000 cars which are sold annually will meet the criteria for the new tax rate. If leased vehicles are included, approximately 800,000 cars in total will be affected. The automotive group says it fears the higher tax rate would mean more employees would reconsider using official cars for private use and as a result, fewer would be sold. Ferdinand Dudenhöffer of the Center of Automotive Research predicts sales could fall by some 150,000 cars annually.

Those that do choose to drive company cars, according to the VDA, would forego size and luxury in their choice of automobiles, effectively “downsizing” so as to save on taxes.

The result of all this, according to VDA calculations, would be a sales downturn of some 2.6 billion euro (dollars) annually and a possible loss of 10,000 jobs.

“Car Chancellor” Standing His Ground

The Finance Ministry has rejected the allegations, calling the gloomy predictions “exaggerated.” The government is standing its ground on the issue, even though the powerful German automotive industry has traditionally had a considerable influence even at the highest levels of government.

That is particularly true in the case of Gerhard Schröder, who even earned the nickname of “Car Chancellor,” due to the fact that he sat on the supervisory board of Volkswagen, headquartered in his home state of North Rhine-Westphalia, and has always aggressively defended carmakers' interests. In general, the Chancellor has enjoyed the good-will of many in the car industry, and was always a welcome guest in the “Schrempp Circle,” a group of auto executives headed by Daimler-Chrysler CEO Jürgen Schrempp which meets regularly to talk shop.

But those warm feelings began to cool during Schröder’s recent re-election campaign. Auto executives were unhappy with the Chancellor’s stance on Iraq and his outspoken opposition to US President George W. Bush. Between 1998 and 2001, Audi, BMW, Mercedes, Porsche and VW watched their US market share rise from 6.6 to 9.3 percent and the carmakers did not want to see those numbers suffer due to fissures in German-American relations and perceptions of anti-Americanism in Germany.

Despite the criticism, the government shows no sign of budging on the company car issue. Finance Minister Hans Eichel badly needs to compensate for budgetary shortfalls and he is hoping the tax hike will translate into an additional 500 million euro ($496 million) for the state’s strained coffers.