Raking it in

A stronger-than-expected economic recovery in 2010 led German authorities on Thursday to raise their outlook for federal, state and local tax revenue from 2010 through 2012 by a total of 61 billion euros ($86.8 billion).

The announcement quickly led Bavarian Finance Minister Georg Fahrenschon, a member of the conservative Christian Social Union (CSU), to call for an immediate discussion on cutting taxes.

"The economy is improving, the new prognoses are surprisingly good, and I think in light of this development there can't be any holdup in tax policy," he told public broadcaster Deutschlandfunk.

"I also think it's false to view the interplay between economic development and tax and financial policy as one-dimensional," Fahrenschon said. "Tax policy is an important instrument. It can stimulate growth and in particular unleash further economic output."

Budget cuts come first

But Chancellor Angela Merkel has resisted calls to cut taxes, saying the government's first priority should be cutting the state budget.

"In this year, we will accrue 50 billion euros more of debt," she told reporters on Thursday. "That's a debt level that we haven't had in decades."

Finance Minister Wolfgang Schaeuble echoed Merkel's sentiment, saying the expected increase in tax revenue only showed that Germany's economic situation was not as dramatic as was previously thought.

"We're on the right path (with budget cuts)" he said in Berlin on Thursday. "It's difficult, but we will carry on."

Tax overhaul by 2013

Any tax cut by Merkel's government would likely be incorporated into a broader simplification of Germany's complex tax code, which Fahrenschon called "anti-competitive, not motivating and not transparent."

"We can't allow increasing wages to be eaten up by taxes," said Fahrenschon, whose CSU is the Bavarian sister party to Merkel's Christian Democratic Union. "I think it's urgent and necessary that we relieve the taxpayer's burden and simplify our tax laws."

Merkel's center-right government is mostly in agreement that taxes should eventually be simplified and lowered, but the Bavarian CSU and the coalition Free Democratic Party (FDP) appear to be pushing the issue more aggressively.

Fahrenschon said discussion should begin in 2011 for a tax overhaul in 2012. Economics Minister Rainer Bruederle of the FDP said he wanted "tax relieve for the middle class" in this legislative period.

Finance expert for the opposition Green Party Gerhard Schick said there was no room for tax relief. He accused the government of playing a "game of hypocrisy," planning the tax cuts to coincide with parliamentary elections also in 2013.

Barbara Hoell of the opposition Left Party said the increased tax revenue shows that "the cuts in social welfare included in the austerity measures are entirely unnecessary."

Short of pre-recession levels

Thursday's increased outlook was in comparison to predictions in May, before the German government raised its expected economic growth for 2010 to 3.4 percent from 1.4 percent. The predictions came from a council of about three dozen experts, including officials from state and federal finance ministries, the German Central Bank, research institutions, municipalities and the Federal Statistics Office.

The council expects increase of 15.2 billion euros in tax revenue this year. Continued growth is likely to increase revenue by 22.4 billion euros for 2011 and by 23.4 billion euros for 2012.

Despite the positive figures, the council predicted Germany would not recover to pre-recession tax revenue levels until 2012.

Author: Andrew Bowen

Editor: Sean Sinico