Tuesday, August 4, 2009

Will the Lying Continue?

The grand coalition started four years ago by revealing a lie. While during the campaign the CDU/CSU spoke the partial truth to voters and proposed an increase of the value added tax (VAT) by two percentage points, the Social Democrats promised not to increase the VAT at all if they were elected. While I assumed back then that the political compromise would be to increase the VAT by 1 percent, the result of the coalition talks was an increase by 3 to 19 percent. The public and the opposition were stunned and enraged by this move.

This time around tax policy is again a major topic in the election campaign. And again the six (including the CSU) major parties differ substantially in their beliefs as to what is necessary for the following four years as well as in their approaches to the problem. Again the VAT and income taxation are the major issues under discussion. I would not be surprised if by the end of this year we will have déjà vu and find ourselves as voters again surprised with a revelation of tax plans that have little to do with what we are promised during the current campaign.

In short the positions of the parties are as follows:

The FDP and the Left Party say what one would expect them to say: The Left wants to finance its generous increase of various social and public investment programs with higher taxes, especially from those who they feel are the rich (53 percent on incomes above 65,000 Euros per year), and also demands a reintroduction of the wealth tax (5 percent on private wealth above 1 million Euros).

The FDP reintroduced its plans for a complete makeover of the income tax code - which is in fact a jungle of regulations hardly anybody understands - and a general lower taxation of people's income (with only three tax rates of 10 percent, 25 percent and 35 percent). To guarantee a sound budget they want to close most loopholes that the current complex tax code provides and the party promises a rigid cut in subsidies and other government expenditures.

The Green Party also favors a simpler tax code though they like to see taxation being used to give incentives for more environmentally-friendly behavior. They ask for an ecologic tax reform, taxing everything that they feel is harmful to the environment. To overcome the current financial and budget crisis the Greens want a onetime taxation of private wealth.

The Social Democrats (SPD) are by and large satisfied with the way things are and therefore seem to be the true conservatives. They argue that in the current economic situation an increase of taxes would poison the little bit of growth prospect there is for 2010 while at the same time the federal budget situation does not allow for any lower taxes, especially after all of the rescue plans and stimulus packages of the past year. However, they promise a little bit of easing for incomes under 52,882 Euros and increase the top tax rate (which is paid for an income above 52,882 Euros) for higher spending for education.

The CDU and its Bavarian sister party the CSU needed a while to figure out what they want in the field of tax policy. The CSU announced early that they would favor tax cuts while within the CDU it took a while until they agreed. One part of the party is - like the SPD finance minister - fixated on the federal budget. They rightly fear that the 3 percent Maastricht criteria will be out of reach for the years to come assuming that drastic measures on the expenditure side of the equation are political suicide. The other part of the CDU is already uneasy with the level of state intervention the federal government has shown under their leadership. They want to regain the title of the heirs to Ludwig Erhard (and thereby regain votes from the FDP) by strengthening private households by leaving them with more of their earned income. In practice this means they are considering lowering the VAT for certain industries and increasing the income level above which the highest marginal tax rate is applied to 55,000 Euros and later to 60,000 Euros.

Besides the details of the respective tax reform proposals, the big question that is being discussed all around the country is whether taxation must be lowered because of the need for more private consumption and growth or if taxes have to be increased in order to stabilize the budget. Even among economists this is a controversial issue. The fact that the tax code must be simplified is not. But I guess this is a bit like the need for universal health care in the U.S. Even though most people believe it is desirable, it was politically impossible to achieve. Sometimes a big crisis offers also a political opportunity for reforms that seemed to be impossible before; maybe now is the time for health care reform in the U.S. and a substantial tax code reform in Germany. That would be a positive surprise and not déjà vu of another campaign lie.

--Tim Stuchtey

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