Sunday, May 29, 2005

Playing the tax game

Web.de cites an article of the "Bild am Sonntag" in which it is reported that after early federal elections this fall the value added tax will rise in order to balance out revenue shortcomings. According to the article leading politicians by the CDU AND the SPD agree that value added tax needs to rise, and they suggest an increase by 4%, from 16 to 20%.

I think - bad idea. Germany's economic problems are largely due to a low domestic demand. People are saving their money for a better day. With increased value added tax, prices for every day life will rise, every shopping trip will end up more expensive. This will lead people to by less than more. This means, domestic demand will decrease further. Investments will be delayed. This will of course affect then businesses more that are dependent on the domestic market, but not so much the larger "global players" who sell their products abroad as well.
If additionally CDU plans would be implemented, where workers protection is decreased, the standard citizen will feel more uncertain about their personal future. More uncertainty - less consumption. People will save the little money have for the future - they may need it as an emergency fund.
The German economy on the other hand needs domestic demand, needs consumer confidence. The growth generated based on export is not strong enough to have labor market effects. So if you kill consumer confidence, you will increase the problems for the German economy.

Furthermore, an increase of the value added tax is unsocial and more likely to widen the gap between rich and poor. As a flat tax an increase of the value added tax will affect the poor more than the rich. For someone who earns only 900 euros, an increase in food purchases from 200 to 208 euros hurts more than for someone who has twice or three times as much money.
The CDU, from the little that is known about their concepts, also plans some other measures that will cost the normal citizen (employees) more. There is the possible introduction of tuition, there is the possibility of introduction of student loans with interest rates in order to replace the current Bafoeg model. This will in the long run make it harder for poorer people to afford an education.

I also see an increase of value added tax critical for the general trust in politics. If an increased value added tax is coming anyways, it might as well come now. It shows, just like in the last federal elections that the two large parties, while pretending to be different and having the better solution, actually have very similar concepts. So what's all the finger pointing and mudslinging about?

Of course, all of these concepts and plans are just that right now: concepts and plans. Nothing is set in stone. The news may be false. So one will have to keep the eyes open of what is happening. However, so far, I don't like what I see.

5 comments:

Kuch said...

Aufbau Ost
Very interesting post. I exchanged emails recently with a German friend about this issue. This friend is at University and is young enough to not remember the similarities between current Germany and the US of the late 1970s.

I have not done an exhaustive, or academic analysis, but the malaise of "low expectations" was also very present here when Jimmy Carter was our president. Ronald Reagan not only lowered taxes (I think from around 70% to approx. 35%), but also rejuvenated our sense of what can be done with a positive outlook.

Of course, one must also realize that this policy cause a budget defecit, like is also the case in Germany (exceeding the requirements of the Growth and Stability Pact)for the last several years. I think that what is important is that the defecit should be "FOR" something (like lowering taxes), and not just as status quo. I believe that at the end of Reagan's second administration that the US tax rolls were in excess of what they were with the higher taxes, because more people were working and paying taxes.

I am hopeful that this formula would also increase the domestic markets in Germany as well. It might also increase the potential for domestic business investment.

Aufbau Ost said...

A deficit of this size might be unconstitutional though (there are constitutional limits on the budget... )

The other thing is: the CDU promises budget consolidation ... .

Miguel (MABB) said...

Hi, I am asking all my German friends that come from the former GDR if they would vote for Merkel for chancellor. Would you vote for her, and why? You don't have to answer, of course, if you don't want. :-)

Aufbau Ost said...

No I wouldn't vote for her. Doesn't have to do with her being East German, her personality or her being a woman. I don't like the kind of policies she and her Party are standing for.

Kuch said...

I see on Expatica that a new Forsa poll came out which indicates that 83% of Germans feel that the EU is not democratic enough, and that Brussels is too far-reaching in its influence. You have mentioned that you believe that 2/3 of the German population supports ratification of the EU Constitution. Given the events of the last couple of weeks, do you feel there is a wave of change in public opinion?