Brigitte Zypries

Economics Minister: Middle Class Needs Tax Reform

  • Why it matters

    Why it matters

    Social inequality is expected to become a major campaign issue in the German general election on September 24.

  • Facts

    Facts

    • In an interview with Handelsblatt, Economics Minister Brigitte Zypries pledged to ease the tax burden for ordinary earners to alleviate a sense of injustice not unlike the frustration that swept Donald Trump to power.
    • Ms. Zypries, a Social Democrat, said some top managers “seem to have lost all sense of proportion” on remuneration.
    • She said faith in the state sector was reviving, with many people having more trust in the state for providing basic services more efficiently and cheaply.
  • Audio

    Audio

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main 75414600 source Kay Nietfeld DPA – Economics Minister Brigitte Zypries talks with Finance Minister Wolfgang Schaeuble before cabinet meeting Feb 2017
Finance Minister Wolfgang Schäuble talks with Economics Minister Brigitte Zypries. Source: Kay Nietfeld / DPA

In an interview, German Economics Minister Brigitte Zypries compared middle-class dissatisfaction over stagnating wages to the rage that elected Donald Trump as U.S. president.

Ms. Zypries, a Social Democrat, spoke seven months before Germany’s September 24 federal elections. The Social Democrats, with new party leader Martin Schulz, have identified economic injustice as a key issue to dethrone Angela Merkel and her Christian Democrats.

Ms. Zypries, 63, is stepping down from national politics in September. She said Germany needs to reform its income and corporate tax structure to create a fairer system and relieve the burden on Germany’s “hard-working middle class.”

The redistribution theme is a standard campaign issue for Social Democrats, but in Germany, it is one that often resonates. Under the current tax code in Germany, wage earners reach the country’s onerous top income tax bracket on all earnings above €60,000 a year.

The result: Germany’s vast, struggling middle class provides the lion’s share of the nation’s avaricious appetite for public dollars. Ms. Zypries spoke with Max Haerder and Gregor Peter Schmitz of WirtschaftsWoche, a sister publication of Handelsblatt.

 

Ms. Zypries, your father owned a large photo laboratory and provided employment to dozens of people. Did he embody values like integrity and conscientiousness that are missing in many managers today?

My father lived these values every single day. “Entrepreneur” comes from a French word meaning “to undertake.” Throughout his life, he remained committed to assuming risks and taking responsibility for his employees. That is a characteristic of many family enterprises I often find missing in hired managers of publicly listed companies. There is a coming and going, often there’s no close connection to the company or its workforce – and unfortunately, no sense of sustainable management.

Are you saying that hired managers inherently have no feeling of responsibility?

Germany has excellent managers, no question about it. But interests and expectations – for example, the short-term concerns of shareholders – often have another focus. It’s a different matter when entrepreneurs are inclined and obligated to think in terms of family generations. They know their parents worked hard to achieve success and difficult periods must be shared and endured. Owners look their employees in the eyes. This creates a moral standard to be lived up to. In my opinion, in large companies there is often too much distance that ends in cold detachment.

You sound quite frustrated about the leadership elite in the German economy.

Not at all. But I’m concerned that many workers can no longer live adequately from their wages, while some of our top managers seem to have lost all sense of proportion. In the last few years here in Germany, we have witnessed developments that clash with our model of a socially just market economy. When I served as Justice Minister, I sponsored a law requiring disclosure of managerial salaries. I hoped that financial shamelessness would be wary of exposure to light – but it seems there is little sense of shame. I would like to see fair remuneration, from the lowest wage groups all the way to managerial salaries.

 

Many people in Germany feel they have been left behind, neglected or not sufficiently rewarded for the hard work they perform.

Do you support – like the Social Democrats in the Bundestag – an upper limit for the tax deductibility of bonuses? Or are you in favor of a maximum ratio between managerial salary and average wage?

Politics shouldn’t intervene without clear necessity in entrepreneurial decision-making, the competencies of supervisory boards or the freedom of contracts. We need more transparency and clear-cut rules. But I’m strongly in favor of bonuses and pensions only being tax-deductible to a limited extent.

Should managers be required to pay the premiums for their own liability insurance?

We have also been discussing this question for years. The underlying question is how mechanisms can be strengthened to compel managers to act responsibly. One possibility would be to end the tax deductibility of premiums for insurance policies with which managers purchase freedom from liability for their actions. For legal and practical reasons, it would scarcely be possible to prohibit companies from paying such premiums.

Are the scandals that you’re alluding to the reason why the Social Democratic candidate for the chancellorship, Martin Schulz, is shaking up the republic with his call for “social justice”?

Martin Schulz is addressing an issue that people care about and find particularly urgent. I don’t believe that people are so concerned about what are sometimes exorbitant salaries at the top echelons. What is considered to be far more unjust is when someone has to slave away 40 hours per week in shift work and only brings home €1,500 to €2,000 per month. That isn’t enough to feed a family and pay the rent in a big city, let alone save any money or allow oneself something special. Things have gotten out of hand, even if we have taken some measures such as strengthening collective bargaining coverage and establishing a minimum wage.

What more do you want to do? Wage calculation isn’t the state’s job.

But tax policy is. So we need to reduce the burden on small and mid-sized companies as quickly as possible. Many people in Germany feel they have been left behind, neglected or not sufficiently rewarded for the hard work they perform. This feeling isn’t much different from the one that Donald Trump rode to victory in the U.S. A tax reform to relieve the hard-working middle class is the correct political response.

Some municipalities are buying back their utilities for water or electricity, sometimes after referendums. Many people apparently have more trust in the state for providing basic services more efficiently and cheaply

We assume the rich would be called upon to pay for this. For instance, through a tax on wealth?

One thing at a time: We need a more equitable tax system in our country, with regard to both income and corporate taxes. Above all, there should be no tax-dumping competition in Europe. That impacts negatively on everyone.

The top tax rate already takes effect at a yearly salary of €53,000 …

… and that’s too soon. Many who aren’t top earners are already taxed at the highest rate. This frequently affects families with children who have to live in expensive cities like Munich. They don’t feel like they’re at the top.

That sounds like a good slogan for the electoral campaign of the Social Democratic Party (SPD). But your fellow party member Stephan Weil, who as the premier of Lower Saxony sits on the VW supervisory board, voted in favor of former CEO Martin Winterkorn receiving a pension of €3,000 per day – and supported a severance package in the double-digit millions for Christine Hohmann-Dennhardt, a management-board member who also belongs to the SPD.

Contract negotiations are the remit of the people responsible in the company and the state. The special role of Lower Saxony at Volkswagen has historical roots – which, by the way, have stood the test of E.U. courts. It brings stability. As Justice Minister, I successfully defended the so-called VW law.

We would like to know how calls for justice by Martin Schulz can be reconciled with the actions of SPD state premiers.

We have to take a close look at what we’re talking about. Valid employment contracts have to be respected – that’s self-evident. Pacta sunt servanda. That also applies to Ms. Hohmann-Dennhardt.

But the SPD members on the VW supervisory board could have refused to approve the underlying contracts worth millions of euros if they actually took their own Social Democratic rhetoric seriously.

That issue should be clarified by Volkswagen internally. Let me say one thing regardless of the situation at Volkswagen: The remuneration of management often doesn’t correspond to its performance.

Why is the state still involved in such companies? Things are out of control not only at VW, but also at Deutsche Bahn.

Your words imply an enthusiasm for privatization that isn’t exactly in tune with the times. We are currently experiencing a different development, a revival of the state sector. Some municipalities are buying back their utilities for water or electricity, sometimes after referendums. Many people apparently have more trust in the state for providing basic services more efficiently and cheaply. I wouldn’t dare to predict what the decision would be if the question were raised today about privatizing the postal service.

We should speak calmly and confidently with the new U.S. government, and also with the individual states. At the moment, everyone is looking only towards the White House, but the 50 states have substantial powers.

Apropos state control: Your ministry is currently working on stricter regulations for digital platforms such as Uber or Airbnb.

Digital services like Uber or Airbnb are encountering resistance in many German cities because many people believe they endanger standards of labor law or the way of life in their own apartment buildings. So we need to have a thorough discussion of what services we want and how we want them, especially how we intend to guarantee fair competition and decent working conditions in the digital world.

You’re not at all fascinated by the innovative power of these platforms?

We need innovation. Our industry and mid-sized companies should use the chance to establish new relationships with customers. Platforms aren’t good or bad in themselves. The issue is how you use them, what business model you pursue with digital platforms. It’s important that the rules of responsibility and fair competition that we value in the analog world– as well as rules to guard against destructive monopolies – should also apply to the digital world.

Do you use such services yourself?

Of course – I’ve made reservations through Airbnb.

Does it bother you that we can book apartments abroad with no problem, but foreigners can’t do so in cities like Berlin?

There are many Airbnb offerings in Berlin as well. But cities must be able to respond when they see that entire neighborhoods are turning into endless tracts of vacation apartments – also in order to protect tenants. This discussion is likewise being conducted in the U.S. We should of course work together with Airbnb, which could collect the bed tax for the city and forward the money.

Many of these services come from the U.S. But its new president Donald Trump is threatening to partition the country off.

We should speak calmly and confidently with the new U.S. government, and also with the individual states. At the moment, everyone is looking only towards the White House, but the 50 states have substantial powers. So when I travel to the U.S. soon, I will also meet with governors – and remind them how many well-paid jobs our German companies secure for them.

When you became the new Economics Minister, many younger members of the SPD turned up their noses. After all you declared your intention to retire from politics in the Fall. Is your job simply a farewell gift?

I don’t think so. It was a pragmatic decision dictated by the circumstances of transition. I have been familiar with the Economics Ministry and its issues for many years – for the last three years, as parliamentary state secretary. And I have had various experiences in ministries.

You are the first woman to hold this office. Does that play a role for you?

The role of women in the economy must achieve a higher profile. There is a massive need to catch up.

How do you intend to change that?

Wait and be surprised. We women are quite creative.

 

This article first appeared in German business weekly WirtschaftsWoche. To contact the authors: max.haerder@wiwo.de and gregorpeter.schmitz@wiwo.de

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