Economic weekly

Wham, Bam, Tax Plan

SPD präsentiert Steuerkonzept
SPD head Martin Schulz (middle), flanked by Hamburg mayor Olaf Scholz (left) and Thorsten Schäfer-Gümbel (right). Source: dpa

On Monday, Martin Schulz, chairman of Germany’s Social Democratic Party (SPD) and chancellor candidate, presented his tax plan. He was flanked by two politicians representing opposing economic wings of the SPD: business-oriented Hamburg mayor Olaf Scholz and left-leaning parliamentarian Thorsten Schäfer-Gümbel.

Commentators in various media have described the proposal as “half-hearted,” a hedge that seeks to reconcile the two wings of the SPD, as well as the split between the party’s traditional voters and the upper middle class. We can look forward to the reaction of the center-right Christian Democrats and Bavarian Christian Social Union, majority partners in the Germany’s ruling grand coalition with the SPD. And let’s not forget the reaction of voters themselves.

The most important details are:

Those with lower and medium incomes – i.e. single party households or married couples with a taxable annual income of up to €60,000 or €120,000 respectively – will have their tax burden reduced by €15 billion per year through lower tax rates and various subsidies. Higher earners will see a tax hike to offset this sum.

The so-called “solidarity” surcharge, originally introduced to cover the cost of German reunification and until now regarded by the SPD as sacrosanct, is to be abolished beginning in 2020. Initially this would only count for singles or married couples with a taxable income of less than €52,000/€104,000 per year. The reactivation of a tax on assets, long a demand by the left wing of the SPD, is not included in the plan. This tax has been suspended since 1995.

The so-called “solidarity” surcharge, originally introduced to cover the cost of German reunification and until now regarded by the SPD as sacrosanct, is to be abolished beginning in 2020.

The plan also seeks to raise the level at which the current maximum tax rate of 42 percent will apply.  This had previously been €54,000 for single incomes and twice that for married couples. Schulz’s plan adjusts that to €60,000/€120,000 and above. It also includes a rate of 45 percent for a taxable annual income of €76,200/€152,400. A wealth tax of 3 percent will also be charged on top for those earning €250,000/€500,000 and above, bringing the highest rate to 48 percent. What is regrettable is that the SPD continues to cling to a policy of “tax on the rich”.

Negotiations on Great Britain’s departure from the EU also began on Monday, as scheduled, despite the election disaster for the Tories and Prime Minister Theresa May. It seems that the UK’s departure from the EU may not be so hard after all. The reasons for this are the dramatic drop in Mrs. May’s popularity ratings – and those of her foreign secretary, “Brexit Boris” Johnson – and the powerful wave of support on which the more Europe-friendly Labour Party chief, Jeremy Corbyn, is surfing. Maybe these talks will end like many — a complicated divorce proceeding between partners who have been married for a long time. Maybe both sides will come to ask: “Shouldn’t we try again?”

Every cloud has a silver lining. This sentiment was first expressed by the wise old ancient Greeks. The saying could even be applied to Donald Trump’s victory in the US presidential election and to the outcome of the Brexit referendum on June 23, 2016. That’s according to an opinion poll conducted by a US polling institute, Pew Research Center, in March and April this year. The institute asked 10,000 citizens in each of the ten largest EU countries – home to 80 percent of the total EU population – how they felt about living in this community of states. In Germany, pro-EU sentiment was up 18 percent compared with last year, in the Netherlands it grew by 13 percent, and even in Great Britain Europhilia rose by 10 percent. Indeed, approval for the European Union did not fall in any EU country apart from Italy, and the support for populist parties and leaders has declined across the board.

The Munich-based Ifo Institute for Economic Research on Tuesday raised its economic forecast for 2017. While an upward revision had been expected, its size came as a surprise. Overall economic output is now expected to grow by 1.8 percent this year, rather than 1.5 percent, and in 2018 it is forecast to hit 2 percent, rather than 1.8 percent. The head of the institute’s economics department, Timo Wollmershäuser, said: “As in previous years, the upturn… is being driven in particular by the construction industry and consumer spending. This is being boosted by industry.” His statement ended with the words: “In the Ifo economic test, companies are rating their prospects more positively than at any time since 1990.” It’s no wonder that the institute is anticipating the number of people in employment to grow, and the economy to accelerate. The working population is expected to rise to 44.6 million next year, compared with 43.6 million this year.

A sense of measure has typically been a characteristic of reports by central banks, particularly the European Central Bank. Given this, it was surprising that ECB economists used the bank’s Economic Bulletin, published on Thursday, to warn about Donald Trump’s economic-policy intentions in very clear words. “[T]here is significant policy uncertainty surrounding the intentions of the new US Administration regarding fiscal and, in particular, trade policies, the latter entailing potentially significant negative effects on the global economy.” Kudos!

All the best, and not just for the coming weekend!

 

To contact the author: ruerup@handelsblatt.com

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