TCS Daily


"F" for Freedom

By Jens F. Laurson & George A. Pieler - October 5, 2009 12:00 AM

Pundits, always eager to find a crack and drive a wedge into it, predict tough and tense negotiations between Chancellor Angela Merkel and her new coalition partner, FDP leader Guido Westerwelle. After all, Germany doesn't like radical change, and the FDP pledged to overhaul the tax code to lower rates, broaden the base, and cut corporate taxes. "Too much too fast" and "Germany can't afford it" are of the general tenor.

The FDP tax agenda may be more than Germany can handle right now, but where is the alternative? The Economist points out that "A single person earning an average income pays more of his wages in income taxes plus social-security contributions than almost anywhere else in the rich world." OECD figures put "Germany...almost at the very top... with regard to the burden of taxes and contributions" among the top 30 industrialized nations. Against this, Merkel's CDU plan for top-and-bottom tax relief (cut the lowest bracket rate, raise the highest bracket threshold) seems paltry. Even that plan would phase in over four years.

If Germany is doing all right with high taxes, why worry? Because the German status quo is economically unsustainable. Its demographic decline and its rising welfare-state costs will cause trouble sooner rather than later. That the nation is emerging faster than expected from recession (and a less-deep recession than many feared) is a tribute to German ingenuity and German caution in resisting calls for a massive fiscal stimulus rather than the moderately robust one it enacted. Yet self-congratulation would be premature, and the future must be confronted, like it or not.

Altogether, it is hard to resist the notion that Germany requires significant tax relief. This is true on good government grounds alone: laundering money through the public sector leaves an estimated 15% or more of economic activity in the 'underground economy', and Health Minister Ulla Schmidt's official-limo junket to Spain made for an especially dramatic example of the ways that Germany is wasting its taxpayers' money. All told there is plenty of room to maneuver on both tax reduction and spending restraint, and fattening the state bureaucracy is like paying off a crime family to let us get on with our business.

In fact, there is more that binds Merkel and Westerwelle together on tax policy than divides them. Beyond merely cutting taxes, both emphasize reform: improving tax policy by purging the tax laws of inefficiencies and special privileges, and reducing individual rates, not just to spur consumption (not a very German notion), but to enhance the freedom of German households to do (save or spend) as they wish. While the FDP agenda goes much further than the Chancellor will consent to, at least the coalition parties are aimed in the same direction, tax-policy wise; something which was never true under the Grand Coalition.

Indeed, there is one specific tax reform proposal that Merkel, Westerwelle, Economic Minister Theodor zu Guttenberg, and even many on the left support: ending so-called 'cold progression' (bracket creep, in popular parlance). This means taxpayers would no longer be booted into a higher tax bracket due to inflation, which in effect imposes a tax increase on German citizens, and levies that increase with no accountability from German politicians. The moral angle here is one reason even the OECD, generally no friend of tax-cutting, criticizes Germany for holding on to this automatic tax-raising device, which most of the civilized world has abandoned.

The U.S. abandoned it in 1985, and therein lies a lesson that may be useful for the Merkel-Westerwelle entente. Once income taxes were indexed to eliminate inflation-induced tax hikes, the U.S. was forced to make hard and public decisions on raising or lowering taxes. Faced with the end of bracket creep, in 1982 the U.S. enacted a large program of loophole closings and enforcement tools. In 1986, the U.S. combined new rate reductions with a more sweeping assault on tax privileges, bringing a lower-rate, growth-enhancing, and fairer tax system that largely endures today.

Permanently lower tax rates enhanced both personal and economic freedom for Americans, surely a goal as important as giving the economy a boost. Could ending cold progression do the same for Germany? It can't hurt to try, and it would be a great place for the coalition to find early success. It would also be a strong reminder that the word "Free" is what truly distinguishes the new coalition from the old.


George A. Pieler is fomer tax counsel to the Senate Finance Committee. Jens F. Laurson is Editor-in-Chief of the International Affairs Forum.

7 Comments

Califronia and Obama get "f"s for failed statist experiments
Reading this article you can almost hear California and the US government zooming by.. in the opposite direction.

Don't forget to add Michigan and New York state to that list
this part just cracks me up:

"In 1986, the U.S. combined new rate reductions with a more sweeping assault on tax privileges, bringing a lower-rate, growth-enhancing, and fairer tax system that largely endures today"

Only a Beltway insider would consider our tax system 'fairer'. Oh wait! The author IS a Beltway insider! My bad!

Barak Hussein Obama! Mmmmmmm Hmmmmmm Mmmmmmmm!

Like LA
Germany looks OK according to overall measures, but in truth it's a lot like LA: A patchwork of posh areas rubbing shoulders with squalid areas. Just take a drive around the industrial Rhein/Rhur region or Berlin to see what I mean. I don't see any way for the German federal government to equalize the posh and squalid, but I do see a large demand for such equalization. I also realize (while most Germans don't) that the equalization efforts will drag the German economy down, hindering prosperity and progress. Hence the FDP's true concern: Keeping the German economy healthy and dynamic lest one day soon German schoolchildren study Polish, Russian and Chinese for careers abroad.

Why is it so hard to cut taxes?
Evidence shows cutting tax rates raises revenue.
Politicians should love that.

Because the evidence is suppressed and...
...it would mean that those who claim that raising taxes helps the economy will have been proven for the frauds that they are.

And...because many of the voters of many politicians won't listen to such facts any more than they will tolerate data that proves that raising the minimum wage creates more unemployment.

I think it is all about power.
Politicians are really interested in power.

They would rather rule in hell than serve in heaven.

Politicians are up close with Civil Servants who want more money NOW!
Anyone who has spent time working with beaucrats knows that they have two caracteristics. First, there is never enough money for them to do their jobs and Second, they never want anyone to benifit from their jobs who they can not make pay for it.

Actually the above isn't quite true. Good people enter the civil service as often as anyother profession. It is the fact that they are not fired for overspending that allows the bad to come to the top and lobby elected office holders.

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