German Budget

Show Me the Tax Money

  • Why it matters

    Why it matters

    Introducing tax reform and relief in Germany would be a great asset during election campaigning, the author argues, and could prove a valuable negotiating tool when it comes to the formation of coalitions after the September vote.

  • Facts

    Facts

    • Germany’s finance minister has already offered voters tax relief of around €15 billion ($16.2 billion). He probably has double the room.
    • According to an OECD study, Germans have a greater tax and social security burden than every other of the 35 countries in the group except for Belgium.
    • In 2016, the government reported a surplus of €6.2 billion. However in 2018, Germany reportedly has a looming budget shortfall of €8.3 billion.
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    Audio

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Berufspendler auf dem Weg zur Arbeit
Hard working: It is about time for some tax relief for the German middle class. Source: DPA [M]

This year will be the third straight time that German Finance Minister Wolfgang Schäuble has presented a balanced budget. As a result, he will go down in the history books as one of the Germany’s most successful finance ministers. And in contrast to many of his predecessors, Mr. Schäuble has managed to ward off the largest fiscal favors requested by his fellow cabinet members.

But now it really is time to give the taxpayers back some of their hard-earned cash. Ever the smart saver, Mr. Schäuble realizes this and is holding out to taxpayers the prospect of €15 billion ($16.2 billion) in tax relief. But when such a penny-pinching calculator like our finance minister is willing to pay out €15 billion, then there’s definitely more in the coffers, and perhaps twice as much spare. You don’t have to be the party chairman of the Free Democrats to have reached that conclusion.

Fiscal policymakers know that any truly sensible income tax reform must involve at least 1 percent of a country’s gross domestic product. So that would be about €30 billion. That kind of money could stimulate the economy. But above all, it would realign the balance between the state and the private sector.

Germany’s political parties have forgotten that it is the people and businesses of this country that generate our prosperity.

In many ways Germany is an economic front runner. Unfortunately that also goes for the amount of social security and taxes paid by the average individual, as the Organization for Economic Co-operation and Development, or OECD, recently determined. According to an OECD study, compared to all other industrialized nations, Germans shoulder an above-average tax and social security burden. On average, 49.9 percent of the average single, childless earner’s overall labor costs flow to the state – that includes their employer’s contribution. Among all 35 OECD states, only Belgians have a higher tax burden.

In other words, the state redistributes almost 50 percent of the country’s gross domestic product. Many of the social policy experts in Germany’s political parties seem to have forgotten that it is the people and businesses of this country that generate our prosperity.

Former chancellor Helmut Kohl once said that socialism begins with the state responsible for a 50-percent ratio. We’re not quite there yet but we are proceeding to new highs, and above all in taxes and social contributions. While Mr. Schäuble’s budget benefits from a favorable employment situation, low interest rates and the cheap price of oil, the hard-working middle class remains the nation’s cash cow.

People’s savings are virtually being confiscated. Life insurance and home savings contracts are no longer yielding returns. As inflation slowly increases, bracket creep is eating away any rise in average income. It isn’t Mr. Schäuble’s fault that German states have hiked the property transfer tax. But it is yet another aggravation for anyone building their own home.

That is why now is the right time to wage an election campaign, based on tax reform and relief.

16 p8 German Tax Revenue on a Record High-01

The Social Democratic chancellor candidate, Martin Schulz, would like a campaign focusing on greater social justice. The other parties should take him up on his offer. Yet income redistribution isn’t the only issue in Germany. In fact, appropriately rewarding good performance has almost become a taboo subject.

Moreover, the political establishment must keep their promises. For example, all of Germany’s political parties promised that when east Germany had been reconstructed, the so-called solidarity surcharge – a flat tax on income that is meant to fund the reunification of the country – would be annulled. Mr. Schäuble’s current plan is to phase the solidarity tax out over the next 15 years.

Even though he’s fought hard on behalf of the euro, there is clearly no place in his heart for major tax reform benefitting taxpayers. Even though for 3 million unincorporated businesses, income tax counts as their version of corporate tax. Many of them would profit from such relief.

The German finance minister needs to think about starting a completely new chapter after the elections. He dreads tax reform debates because the reforms are usually only about helping a smaller group and often create jealousy among the rest of the population. But in fact, he could fight this fight in a similar way to how he fought for the euro bailouts of the past; in this case, reason and logic easily prevails over emotion. And there is plenty of support for such a big project.

There is no doubt the pro-business Free Democrats, who are hoping to reenter parliament in September, would support lowering taxes. The Green Party too. The latter had been quietly discussing whether or not it’s time to give something back to their own voters for some time now. There are many high earners among Green voters and their sagging popularity will give that internal debate fresh momentum.

But while the Free Democrats and the Greens have been talking openly about tax reform, even at party conventions, the ruling coalition of Social Democrats and Mr. Schäuble’s Christian Democratic Union are holding back. The Christian Democrats do have some resolutions on the issue, but they are nowhere near an election manifesto.

The members of the ruling coalition have purposely shunted the topic to expert committees and won’t give the results the nod until their own party conventions. Supposedly it is the Social Democrats’ Mr. Schulz who wants policies that appeal to the hard-working middle classes. That group is waiting eagerly for more money in their paychecks. Now would be the best time to start negotiating.

 

To contact the author: sigmund@handelsblatt.com 

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