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.
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.
Fears of a Domino Effect
It is no accident that the finance minister, who fears for his austerity package, is at the heart of the controversy. In June, the German government agreed to a plan to reduce spending by €80 billion ($95.7 billion) by 2014 in the largest package of cuts seen since World War II. The austerity program aims at reducing the budget deficit and helping to protect the euro, whose value slid precipitously earlier this year when Greece was threatened with bankruptcy and other euro zone countries experienced debt crises.
Schäuble is worried that once the first element falls -- the nuclear fuel-rod tax, for example -- it could trigger a domino effect and threaten other cost-cutting measures.
For weeks, Schäuble has been jostling with Environment Minister Norbert Röttgen, a fellow CDU member, and Economics Minister Rainer Brüderle, who belongs to the FDP, about whether the €2.3 billion in revenues from the fuel-rod tax should be used to reduce the public debt or pay for the development of renewable energy sources.
Despite recent good news about improved economic growth and better revenues, there will be no tax giveaways, at least if Merkel and Schäuble have their way. Vice Chancellor and Foreign Minister Guido Westerwelle, who is head of the FDP, recently returned to his old ways when he said that it was time to put tax cuts back on the agenda, because of the improved economic situation. The FDP had pushed to have tax cuts included the coalition agreement after the September 2009 election, but the issue was sidelined by Merkel's government as a result of the economic crisis.
A call from the chancellor was enough to put him back on track. Merkel made it clear to Westerwelle that tax cuts are not an option, and that she and Schäuble had agreed that sorting out Germany's finances should take priority. Westerwelle had no choice but to relent.
Putting the Brakes On
The turning away from former campaign promises has to do with the so-called "debt brake," an amendment to Germany's constitution that limits the government's ability to reform the tax system based on the current state of its finances.
From an economic standpoint, the additional revenues that the current rapid economic upturn will provide for the government's coffers are only temporary. Tax cuts, on the other hand, have a permanent impact, because they enlarge the gap between regular expenditures and regular revenues, a phenomenon experts define as a "structural deficit." Under the debt brake legislation, the government is required to virtually eliminate the structural deficit by 2016. A tax reform, however, would achieve the opposite effect.
Schäuble is trying to satisfy the requirements of the debt brake with the austerity package, which explains why he is defending it against its critics. Even if the measures do not affect all taxpayers, the package clearly amounts to a tax increase.
The fuel-rod tax, for example, would be very costly to electric utilities. If it is implemented as planned, nuclear power plant operators will hardly be able to pass on the new cost to their customers, because the electricity produced by nuclear power plants is too inexpensive.
In Germany, the price of electricity per megawatt hour is usually that of the producer that most recently connected to the grid, which, of course, is always the most expensive producer. Even if the utilities were to add the new tax as a surcharge to the electricity they generate from nuclear power, the resulting price would still be much lower than that of electricity generated from coal. As a result, the energy companies have no way of passing on the cost of the tax -- meaning that it directly eats into their profits.
The energy giants are now working under enormous pressure to find ways to pass on the costs of the new tax to their customers. They are trying to dissuade the government from implementing the fuel-rod tax and are offering contractually guaranteed payments in return. The costs of these payments could then be recouped much more easily through across-the-board price hikes.
Passing On Costs
When it comes to the aviation tax, the situation is more straightforward. There is no doubt that airlines will add the new tax to ticket prices.
This could lead to a noticeable price increase of between €8 and €45, depending on the length of the route. Companies and trade associations are up in arms about the proposal and are getting expert opinions from constitutional law experts in preparation for a battle over the new tax.
The opponents of the aviation tax received a prominent supporter last week. Vice Chancellor Guido Westerwelle, who was forced to abandon his plans for tax cuts, suddenly saw a way to score some political points and improve his image. He got his deputy in the Foreign Ministry, Martin Biesel, to write a letter to the Finance Ministry last Wednesday to "formally oppose" the plan. In the letter, Biesel argued that the new tax should be subject to a time limit.
But Westerwelle's attempt to oppose the tax is unlikely to succeed. This week, Finance Minister Schäuble plans to meet directly with Westerwelle to convince him of the ongoing need for the tax. Schäuble will also meet with other cabinet ministers affected by the plan in the coming days to negotiate the configuration of the austerity package. To be on the safe side, he made sure ahead of time that he could count on the chancellor's support.
Cracks in the Coalition
For example, he will have to reach an agreement with Economics Minister Brüderle over the changes to the eco-tax, which would impose €1.5 billion in additional tax payments on companies with highly energy-intensive production processes. This, too, is a highly contested move.
"Germany must remain an industrialized country. We cannot drive companies that require a lot of energy out of the country with the eco-tax," says Michael Fuchs, the deputy leader of the CDU's parliamentary group.
But Fuchs, an economic expert, also understands the problem Schäuble faces, which is why he is offering the finance minister a deal that is likely to cause cracks within the coalition's unstable power structure. Fuchs wants to reverse a recent reduction in the rate of value-added tax (VAT) that is charged on hotel stays. The reduction was a pet project of the FDP and the conservative Christian Social Union (CSU) and represented a windfall for the hotel industry worth billions.
"Companies are benefiting from reduced value-added tax rates worth a total of €10 billion," says Fuchs, who argues that it ought to be possible to eliminate at least a small portion of the tax break. "In my opinion, that could be the VAT reduction for the hotel industry. It was a mistake, because it made the VAT system even more complicated."
Fuchs can count on the support of CDU/CSU parliamentary floor leader Volker Kauder, who also believes that changes in the VAT rates are unavoidable, and that the hotel discount should be the first to come under scrutiny.
No matter how the debate over the eco-tax turns out, someone -- be it corporations, hotel owners or citizens -- will always end up paying higher taxes.
The government also plans to introduce another innovation in tax policy in 2012, at which point it intends to collect at least a portion of the costs it incurred to bail out the financial industry during the crisis. To that end, a tax will be imposed on financial market transactions. This financial transaction tax can be easily passed on to bank customers.
And there could be even more bad news on the way for taxpayers. "I advocate raising the maximum tax rate for higher earners," says Saarland Governor Peter Müller. He feels that the federal government's austerity package is too one-sided and he is critical of what he believes is its lack of social balance. Higher earners, in Müller's view, should also bear their share of the burden. "I hope that the FDP will also prove to be understanding on this issue," says Müller.
Bavarian Governor Horst Seehofer, the leader of the CSU, also has his sights set on higher earners. This fall, his state's finance minister, Georg Fahrenschon, is expected to unveil a tax reform model that includes higher taxes for top earners.
The opposition, whose approval the government needs in the upper house of parliament, the Bundesrat, would have no objection to such plans, which have long had majority appeal within the center-left Social Democratic Party (SPD). In the main motion on economic and fiscal policy for their party convention in late September, the Social Democrats advocate raising the maximum tax rate to 49 percent, to apply to annual taxable incomes of €100,000 and over. "We will use all of the roughly €5 billion in revenue this measure would generate to pay for future investments, particularly in education," the motion reads.
High Health Costs
Higher taxes are not the only way the government plans to reach into citizens' pocketbooks. The statutory contribution to unemployment insurance is expected to rise from 2.8 percent to 3 percent of gross pay. Experts believe, however, that contributions will have to be raised to at least 4 percent to secure funding for the Federal Labor Office in the long term.
It is already clear that health insurance contributions will increase, rising from 14.9 to 15.5 of gross income in January, with employees paying 8.2 percent of the total contribution. Employees whose monthly salary exceeds a certain level, currently set at €3,750, will also have to pay around €11 extra per month.
Then there are the so-called "supplementary contributions" that every statutory health insurance company is allowed to charge if it needs to. Currently, they cannot exceed 1 percent of the share of an individual's income that is subject to contributions. In the future, however, health insurance companies will be able to demand considerably higher contributions, which, for high earners, could amount to a double-digit sum per month.
But it doesn't stop there. City and local governments, which are weighed down by high costs, in particular the cost of providing accommodation to welfare recipients, are threatening to introduce additional burdens on taxpayers. According to a poll conducted by the consulting firm Ernst & Young, 84 percent of municipalities have announced increases in taxes and fees, and 60 percent intend to extricate themselves from their debt problems by cutting services.
The result is twofold: As local governments curtail services, such as eliminating some street lights, as well as closing youth centers and swimming pools, property and local business taxes will go up, as will admission charges for museums. The city of Frankfurt has already raised its street cleaning fees by about 5 percent, while residents of Saarbrücken in western Germany have seen a 10 percent increase in sewage charges.
The dog license fee in Duisburg has gone up by 16 percent, while Gera in eastern Germany raised its fee by more than half. Nürtingen, a town in southwestern Germany, increased cemetery fees by 15 percent. Weimar in eastern Germany introduced a "culture tax" for tourists, while Cologne has approved a similar tax.
There is a certain irony to the development, particularly at the federal level. The conservative-liberal coalition, which had promised tax cuts in the euphoria of its election victory, would be responsible for one of the biggest tax increases of the recent past.
It seems that history does repeat itself, but not always as expected. When the SPD/Green Party government came into power in 1998, it was widely expected to increase taxes and fees, but then the opposite occurred. It ultimately launched the biggest tax reform in postwar German history.
Merkel and Westerwelle are a long way from doing that.