TCS Daily


Tax and Spend Lessons From Germany

By Amity Shlaes - May 11, 2006 12:00 AM

Bloomberg columnist Amity Shlaes alerts TCS readers to the tax situation in Germany, and lessons for Americans:

Right now we're having an intense debate about the merits of the Bush tax program. But it is probably worthwhile to recognize that the idea of tax increases is not merely theoretical. The other half of the experiment is being carried out in Europe.

Germany has a budget problem and so is increasing the value added tax (VAT). To deliver what the budget teams demand, Germany has discovered to its own chagrin, a rather large tax increase is required. So Germany is now planning the largest tax increase in history, an increase in the Value Added Tax to 19 per cent from 16 percent. The government recognizes and is even openly acknowledging that the consequence will be lost growth. (For more on this, see my updates at Bloomberg).

As if that were not enough the Social Democrats are demanding and getting a "Reichensteuer," a rich man's tax. It is an increase in the top marginal rate of income tax, mainly just to demonstrate that they are good class warriors. Aside from scoring points for the left-leaning party, the only effect of that should be to drive the job-creators over to Belgium or Luxembourg. Or to other tax havens.

The Social Democrats are, to my mind, worse than their Marxist parents. Hey, everyone is wrong from time to time. At least the Marxists of West Europe were sincere! Did I mention that they are also talking about introducing expanding the capital gains tax so that it affects more individuals?

You really want to keep your eye on Chancellor Angela Merkel. The reality is that she is stuck in a grand coalition, which means she must share the leadership with the Social Democrats. Angela is clearly a "mensch'' and she is hard not to like after Gerhard Schroeder, who was so very plastic.

But you want to remember that she is by training a particle physicist. The first half of her career was about doing science from top down; in other words she is more of an engineer by philosophy than a gardener. Temperament matters in a leader. Even someone who hates communism viscerally, as Angela does, won't naturally be a free marketeer unless it fits in her personality.

Amity Shlaes is a columnist with Bloomberg news and a TCS contributor.

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3 Comments

Germany may be worse...
But we sure have a lot to do. We need to flatten our taxes, cut out the socialist spending, then make the tax a consumption tax and repeal the 16th amendment.

Let us know.
The Republicans in Congress have just been able to get some of the tax cuts continued to future years.

Let us know how the VAT tax increase in Germany helps the economic productivity of Germany on the world stage.

do they charge VAT on items that are exported?

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