VAT to be set at 25 percent?

The German Institute for Economic Research (DIW) says that the German government can fill its gaping budget hole by increasing Value Added Tax (VAT) from 19 to 25 percent from 2011.

“By announcing a VAT increase now, people would start buying goods today, knowing they would cost six percent more in the future," Klaus Zimmermann, the president of DIW, told the regional daily, Rheinische Post.

“There is no other way the government can balance its books.” Zimmermann added, pointing out that Scandinavians already pay 25 percent VAT.

Due to the financial and economic crisis and numerous stimulus measures that have been agreed, the German cabinet on Wednesday revised its budget deficit forecast for 2009 and said its new debt would increase from an earlier estimate of 10.7 billion euros to a record 47.6 billion euros ($66.2 billion).

Not everyone agrees that raising VAT is the answer

Reiner Holznagel, the CEO of the Federation of German Taxpayers has slammed Zimmermann's suggestion. “The government last raised VAT in 2005, just after the current grand coalition was formed,” he said.

At that time Berlin increased VAT from 16 to 19 percent. “The government then also said it needed to raise VAT to balance its budget. We now know that they never balanced the books, they simply went on spending more,” Holznagel said.

Holznagel also rejected the reference to Scandinavian nations. “That's like comparing apples with pears. A large part of VAT revenue collected in Scandinavian countries is used to fund social security benefits. You can't compare this to the way the German system is set up,” he said.

“It's time (Berlin) started thinking about lowering taxes instead,” said Holznagel. “The government doesn't have an income problem, they have a problem with the way they spend taxpayers' money."

Criticism has also come from the Confederation of German Trade Unions (DGB).

wl/dpa/AFP

Editor: Susan Houlton