Dumping Election Promises: German Government Pulls a Bait-and-Switch on Taxes

By Peter Müller and Christian Reiermann

Chancellor Angela Merkel's government came into power promising tax cuts. Now, it is proposing a raft of new taxes and is raising paycheck deductions. Reducing the budget deficit is now seen as more important than keeping campaign pledges.

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German Finance Minister Wolfgang Schäuble, who is a member of the German parliament for the center-right Christian Democratic Union (CDU), is 67 years old. He has been in the Bundestag for 37 years, longer than any other current member of the parliament. Under former Chancellor Helmut Kohl, he helped reunite Germany and ran the Chancellery. He has been his party's parliamentary leader and its chairman, and he has served twice as interior minister. He is now serving as finance minister under Chancellor Angela Merkel, who sees Schäuble as the most important cornerstone of her government.

Antje Tillmann, a CDU member of the Bundestag from Erfurt in eastern Germany, is 45. She has been in the Bundestag for eight years, and she has an ambitious goal: to simplify Germany's Byzantine tax laws.

The question is: Which of the two will prevail if they disagree?

Tillmann used to work for the German tax authority. She has prepared a list of 97 ways in which she believes Germany's tax system can be improved.

Lowering Expectations

Schäuble's staff is currently reviewing the list, but he has no intention of implementing it in its entirety. The list contains 13 ideas proposed by state finance ministers that by themselves would already mean €500 million ($635 million) in lost revenues. Another proposal, which would allow private individuals to deduct fees paid to tax accountants, would deprive the government of another €400 million in revenue. These two examples alone show that Tillmann's proposed reforms are about a lot more than getting rid of a little bureaucracy. In fact, together they add up to a substantial tax reduction.

For that reason, Schäuble has sought to lower expectations. "Many tax simplification proposals cannot be implemented without substantial revenue losses," he says. "But there are also ways to simplify the taxation process that have relatively little impact on tax revenues." He wants to propose measures which only entail "a limited amount of tax relief," something he says is essential given the importance of consolidating Germany's national finances.

The government's ultimate goal is now solid finances -- which means that the coalition, which came into power promising to reduce taxes, has reversed course. Schäuble, with the full support of Chancellor Angela Merkel, is now pushing for tax increases.

Feeling the Effects

Ordinary people will soon feel the effects of the government's agenda, both directly and indirectly. Those effects will include higher health insurance contributions, which will bring in additional revenues of up to €6 billion per year (see graphic), higher contributions to unemployment insurance (€1.6 billion), an aviation tax (about €1 billion), a tax on nuclear fuel (€2.3 billion), a financial transactions tax (€2 billion) and an eco-tax with fewer exceptions (€1.5 billion). And as if this weren't enough, Peter Müller, the CDU governor of the western state of Saarland, proposes raising the maximum tax rate, because, as he says, "strong shoulders must carry more of the burden than weak shoulders."

The coalition government of Merkel's conservatives and the business-friendly Free Democratic Party (FDP) is no longer arguing over whether and to what extent citizens and companies should face additional taxes. Now the government is more interested in determining how its new revenues will be distributed.

Even officials within the government recognize the deceptive nature of its plans to simplify the tax code while simultaneously implementing massive increases in taxes and fees. "We should not allow the meaningful debate over simplification of the tax code to divert attention from the fact that the government plans to pay for a portion of the austerity package with tax increases," says Josef Schlarmann, head of the Christian Democrats' small-business association.

For months, the government had fueled the German population's hopes for a more simplified tax system. But even that prospect was already a pared-down version of Berlin's former plan to reduce taxes. The message the government sought to convey was that cleaning up the tax code is far more important to the overall economy than reducing taxes. Now it is becoming increasingly clear that nothing will come of the former tax relief plans and that few of the promises to simplify the tax system will in fact materialize. Instead, the country could see increases in taxes and fees in the double-digit billions.

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Graphic: Planned new taxes Zoom
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Graphic: Planned new taxes



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