Merkel's government stuck to its plan to increase the value-added tax from 16 percent to 19 percent starting in January 2007 and received parliament's approval on Friday, despite numerous warnings and criticism from economists and politicians that the hike could damage the recovering economy.
German economists have repeatedly warned that the increase could put a damper on consumer spending, which has just started to pick up, is likely to push more workers to the employment black market and keep the government from finding long-term solutions to its overspending.
"The value-added tax increase is being used almost only to fill holes in public spending," Professor Michael Hüther of the Cologne Institute for Business Research told the mass-market Bild newspaper. "That's taking away the pressure to examine state spending and save more."
Every year, Germany spends about 40 billion euros ($51 billion) more than it earns in taxes. The government hopes the higher value-added tax will deliver an extra 20 billion euros into the tax coffers.
One time Merkel designee for finance minister Paul Kirchhof also told the newspaper he opposed "any policy that would increase taxes."
Opposition in and outside of coalition ranks
Guido Westerwelle, the leader of Germany's biggest opposition party, the free-market liberal Free Democrats, also blasted the plan for Germany's largest VAT tax increase, arguing it is unnecessary and harmful.
Members of the ruling grand coalition, including Social Democrat Niels Annen, said they wanted to see how the tax would be implemented.
Annen told the public broadcaster ARD raising taxes on low-income workers "would be socially unfair as well as economically wrong."
Before Friday's 396 to 146 vote, he added that he would vote in favor of the increase but would be against any further tax hikes.
"After this value-added tax increase there cannot be any additional massive burdens for normal people," he said. The country's last VAT increase came in eight years ago when the tax went from 15 percent to 16 percent.
Unpopular with consumers
The tax increase leaves Germany just below the EU's average standard VAT rate of 19.34 percent, about halfway between Cyprus and Luxembourg's 15 percent and Denmark and Sweden's 25 percent.
According to a poll conducted ZDF, another German public broadcaster, 78 percent of people are against the tax increase. Resignation, however, appears to be setting in as another study showed a majority of Germans expect the government will come up with even more tax hikes over the next three years.