Plugging the Holes in Germany's Tax Laws

Amid meager growth and a ballooning budget deficit, German Finance Minister Hans Eichel has had to put his red pen to extra use these days. For the 2004 budget, cutting spending has become a top priority as has closing a number of popular, yet expensive tax loopholes.

According to some reports in the media, by getting rid of tax allowances for home owners, commuters and others, Eichel hopes to bring in an extra €10 billion each year to the government’s coffers beginning in 2005.

Citing a letter from the finance minister to Chancellor Gerhard Schröder, the Financial Times Deutschland said on Tuesday that the measures would net at least €5 billion in revenue starting next year at the expense of those firms and individuals who previously benefited from the loopholes.

Giving back to the people

But a spokesman for the Finance Ministry disputed that closing tax loopholes would amount to a “burden” on taxpayers. He said that such allowances amounted to taxpayer-supported subsidies and that ending them would give the government “the chance to give the funds back to the citizens.”

Since many of Germany’s cities and municipalities are broke, one might be forgiven for thinking anything that might fill federal and state treasuries with more tax revenue would fly through the Bundesrat, the upper house of parliament that represents Germany’s federal states. But the conservative opposition, which currently controls the Bundesrat, has instead already announced it would fight many of the measures Schröder’s cabinet is likely to approve on Wednesday.

On one side there are those regional leaders who feel the federal government is not doing enough to help increase municipal tax revenues for small towns and cities. On the other are those conservative state politicians who disagree with how the ruling center-left coalition of Social Democrats and Greens are planning on financing tax cuts that are being brought forward a year to help spark economic growth.

Attempting to narrow the divide

One of the most controversial points in the draft budget legislation is Eichel’s intention to rebalance the country’s “stability pact” that divides up the total national debt allowance between state and federal authorities. Since the federal government intends to cover some of the responsibilities of the impoverished states and municipalities, he wants to change the ratio from 55 to 45 percent in favor of the states to allowing both sides equally borrow the same amount.

The federal-state debt ratio is important because Germany continues to breach European Union deficit spending rules that require euro-zone members to keep their budget deficit under three percent of gross domestic product. If Germany does not lower its deficit by next year – it's expected to hit 3.6 percent of GDP in 2003 – the country could likely face sanctions from the EU.

Drowning in debt

“Eichel’s plans are unacceptable. It’s an attempt by a drowning man to pull others down with him,” said Christian Wulff, the premier of the state of Lower Saxony.

Adding to the finance minister’s woes, the opposition has taken aim at his method of financing tax cuts that would lower income taxes for many Germans by up to ten percent starting next year.

Besides ending tax allowances for home owners and commuters, self-employed professions such as doctors, lawyers and accountants are also likely to be required to pay some new form of corporate taxes to help increase municipal tax revenue.

“The principal of in-the-left-pocket, out-the-right-pocket is no signal for (economic) recovery,” said deputy parliamentary leader of the liberal Free Democrats Carl-Ludwig Thiele.