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  • The proposed ‘Flat Tax’ dominates the German election debates

    Posted by Ralf Goergens on September 13th, 2005 (All posts by )

    This is from last month

    KEHL AM RHEIN, Germany (UPI) — Germany`s possible next finance minister Paul Kirchhof wants to radically simplify Germany`s complex tax system. His Christian Democrats have termed him a visionary, and some experts believe his plans for a flat tax might help Germany`s struggling economy by attract long-lost foreign investments.

    “His model would be a very good solution in comparison to everything all the parties have so far introduced,” Alfred Boss, senior economist at the Kiel Institute for World Economics, said Tuesday in a telephone interview with United Press International.

    Kirchhof is a figure the CDU/CSU has long wanted. Until chancellor candidate Angela Merkel introduced the bloc`s “competence team,” and Kirchhof as her senior finance adviser, the party was battling a popularity decline in the polls.

    Then came Kirchhof, a Heidelberg University professor and former constitutional court judge who has no party affiliation, and his plan of a flat tax: All Germans, he argues, should pay a quarter of their income to tax authorities, and then, they should be released into “the garden of freedom.” To finance his visions, he wants to get rid of all the 418 myriad allowances and multiple tax bands of Germany`s complex fiscal system.

    “Instead of needing 12 Saturdays to fill out a tax return, under the new system one would need just 10 minutes,” Kirchhof said last week. “I want to give back voters their freedoms by letting them decide what to do with their money.”

    Kirchhof initially looked like the Christian Democrats’ star and vote winner, but the flat tax has since then become the dominant issue of the current election campaign. The German tax system is the most complex in the world, so that reform is urgently needed, but each of the hundreds of tax exemptions have been hard won and fought for by various special interest groups, like farmers’ and miners’ associations, trade unions, industries dependent on subsidies for their survival, well connected individuals and corporations who pay no taxes at all thanks to the exemptions, ect, ect. Unfortunately Kirchhof’s proposed flat tax has manged to unite all those groups against the Christian Democrats, and not just because they fear for their tax privileges, for they also fear that the funding for subsidies they currently receive will vanish if Kirchhof’s plans will be put onto practice. On top of that said plans have been widely mis-characterized in the press, increasing those fears.

    The Christian Democrats also haven’t looked very good. Once Angela Merkel realized that the flat tax wasn’t going over well with the voters, she quickly relabeled Kirchhoff as a harmless academic without any real influence. This backtracking on the former star of her ‘competence team’ has disillusioned those who know how urgently Germany needs reform, without placating those Christian Democrats who fear that their various clienteles might lose billions of pork barrel spending.

    Right now the Christian Democrats and Free Democrats (a small pro-market party) on the one hand, and the Social Democrats, Greens and the new ‘Linke’ (an amalgam of the former East German communist party and former Social Democrats) on the other are even at the polls, at 48.5 percent each. If there aren’t any big changes in the last five days, a ‘Grand Coalition’ of Social and Christian Democrats is the most likely outcome. While less popular than a coalition of Christian and Free Democrats, voters prefer it over a continuation of the current Red-Green coalition, leave alone a Red-ReallyRed-Green coalition.

    Either way, right now Germans aren’t desperate enough for quick and effective reforms, so that Merkel can’t hope to emulate Margaret Thatcher just yet:

    she may have the same determination as Thatcher, but she has a much harder job. By the late 1970s the British were really desperate. They were prepared, in the final analysis, to accept any medicine if it would revive the “English patient”. Do Germans feel the same way now? Probably not. There is widespread concern about unemployment, but one doesn’t get the feeling that chaos is around the corner. During the British “Winter of Discontent” of 1978-79 bodies were left unburied, garbage was not collected, and transport did not run. Civilization appeared to be breaking down. The British electorate at that time was seriously prepared to take a gamble on Thatcher and her exciting, somewhat terrifying vision for Britain.

    Sooner or later they will become desperate enough, though, and the pain will be the greater the longer it takes.

     

    8 Responses to “The proposed ‘Flat Tax’ dominates the German election debates”

    1. Lex Says:

      Ralf, Intrade has “CDU/CSU to Win most seats in the Bundestag in the next election” at 89/90 bid/ask. Probably a better predictor than the polls.

    2. Ralf Goergens Says:

      I hope so.

      Intrade says nothing about the Free Democrats (FDP). If they don’t perform well enough, there will be aGrand Coalition. It looks as if the Social Democrats will be the junior partners, so that Schröder will at least be gone.

    3. Stevely Says:

      I don’t think so, for a German election. Who are most of the people who make the trades on Intrade? I would think people from English speaking countries with little familiarity with German politics.

    4. Lex Says:

      Stevely, the relevant population in this case would be “people willing to place a bet on the German election”.People who put money on the table make better predictions than people answering a poll. I think I can safely assert that categorically.

    5. Adrian Says:

      Intrade may be a good predictor but there are two separate questions here:
      1) Will CDU/CSU win more seats than SPD?
      2) Will CDU/CSU+FDP win more seats than SPD+Greens+Linke?

      Intrade bets are on the first question and there is very little doubt that CDU/CSU will be ahead of SPD. No poll has shown SPD less than 6 points behind.

      But the real question is the second one and on that front CDU/CSU+FDP are not doing so well. Since Greens and Linke each poll about the same percentage as FDP, CDU/CSU could be ahead of SPD by 7 or 8 points and CDU/CSU+FDP could still be short of majority.

    6. Steve Says:

      Ralf, thanks for bearing such great news! Two dreams may be about to come true.

      If Schroeder’s out then our two countries can get relations back on a more productive track. And If Germany enacts a flat tax, America will be forced to follow suit in under a decade.

      Can France be far behind?
      -Steve

    7. Ralf Goergens Says:

      Schröder is as good as gone, and the flat tax will ahve to get thoroufgh sooner or later. I really am looking forward to that one, although it might take a while in case of the flat tax

    8. Mitch Says:

      We’re sort of backing into a flat tax in the US with the “Alternative Minimum.” I wound up paying a non-trivial sum under that scheme for 2004. If they could pare back the rate to 20% from the current 26% or 28%, and restore some kind of personal exemption (effectively giving a break to low-earning taxpayers), I’d go for that.