German parliament to pass biggest post-war tax hike

19 May 2006

  
BERLIN – Germany’s parliament was poised Friday to approve the biggest tax hike in the post-war era despite fears it could harm the country’s modest economic upswing.

Chancellor Angela Merkel’s grand coalition plans to raise value- added-tax to 19 per cent from the current 16 per cent as of January 1, 2007.

This and other measures are expected to yield the government a whopping 19.4 billion euros (24.8 billion dollars) in extra revenue next year.

Funds will be used to plug holes in the country’s gaping budget deficits which have overshot the eurozone limit for the past years.

But given that the move is expected to boost the average annual tax bill of a married couple by 560 euros, experts warn it could further dampen the already weak domestic demand in Europe’s biggest economy.

Analysts fear that economic growth, which is slowly picking up after five years of stagnation, could go back into a tailspin.

Eckart Tuchtfeld, a senior economist with Commerzbank in Frankfurt, said following expected GDP growth of 1.5 per cent this year, Germany’s economy would likely post only a sickly 1 per cent growth in 2007.

“Consumer prices will go up … and there will be zero growth in domestic demand next year compared with 2006,” he warned in comments to Deutsche Press-Agentur dpa.

Even Chancellor Merkel insisted during her election campaign last summer that “tax increases … would damage the economy. We will never do it.”

But she swiftly changed her tune after being narrowly elected in September.

There remains considerable public opposition to the tax hike.

“Say NO to the this tax madness!” screamed a banner headline in Bild Zeitung, Germany’s biggest selling tabloid daily.

Bild warned that the tax hike would “strangle” growth in 2007 and said this would harm efforts to bring down Germany’s chronically high unemployment rate, which is still stuck at 11.5 per cent despite the present economic growth.

Among other taxes to be raised from next year are insurance policy taxes which also go up to 19 per cent.

A so-called “rich people’s tax” will increase income tax on singles earning over 250,000 euros and couples earning over 500,000 euros annually to 45 per cent from the current 42 per cent.

In addition, tax benefits are being eliminated including subsidies for people who travel long distances to work, overall income tax deductions and write-offs for people who work from home.

Drawing special criticism is the fact that money spent on tax advisors can no longer be written off against taxes.

“This amounts to throwing sand in the eyes of the citizens,” grumbled the newspaper Die Welt, adding, “It’s easier to rip people off when they don’t even know what’s happening.”

Germany has one of the most complex tax systems in the world and many people resort to using tax advisers to file their returns.

The tax measures are expected to win overwhelming approval Friday in the Bundestag given the big majority enjoyed by Merkel’s grand coalition of her Christian Democratic alliance (CDU/CSU) and the Social Democrats (SPD).

Easy approval for the package is also expected in parliament’s upper chamber, the Bundesrat, before the summer parliamentary recess.

Overall, the measures amount to what experts say is the biggest single tax increase since modern Germany was founded in 1949.

DPA

Subject: German news