Germany’s Coffers Are Overflowing, But No One Is Talking About Tax Cuts

The German government never had so much money or so many ideas about how to spend it. The one thing that isn’t being discussed is giving it back to taxpayers.

Tax cuts — a fixture of the political debate in the U.S., where the government hasn’t balanced its books in decades — are barely on the agenda here, even though Germany’s next government is expected to post a consolidated budget surplus of roughly EUR50 billion ($62 billion) between now and 2021, according to finance ministry calculations.

“It is sort of a through-the-looking-glass world,” said John Kornblum, a former U.S. ambassador to Germany, of the two countries’ differing attitudes. “Traditionally Germans have been in favor of hoarding resources rather than lowering government expenditures.”

Chancellor Angela Merkel’s new government, set to come into office next month if her coalition partner approves the alliance, will be no exception. Its 177-page policy platform includes only one small tax cut worth EUR10 billion over four years and limited to low earners, next to nearly EUR50 billion of spending on child care, education, infrastructure and welfare benefits.

Despite the state’s overflowing coffers, Ms. Merkel’s conservatives had to talk their left-leaning partners out of raising taxes during the tense negotiations over the coalition agreement.

The aversion to discussing tax cuts on business profits and personal income is surprising, many economists argue, because Germany — despite its cultivated self-image as a stronghold of fiscal rectitude — has among the highest taxes in the world and a habit of heavy state spending.

The tax wedge — the share of wages that workers and businesses pay in tax and other mandatory levies — is 49.4%, second only to Belgium among the 35 members of the Organization for Economic Cooperation and Development. Total government spending, meanwhile, has risen around 10% since 2014. At 45% of gross domestic product, it is 9 percentage points higher than in the U.S.

Lower corporate and income taxes could lead to higher spending and investment, boost imports and lower the nation’s giant trade surplus, economists say. That would please trading partners such as the U.S. which have chafed at Germany’s record run of current-account surpluses — a measure of excess savings in the economy.

“It would be better for [Germany’s] long-term growth prospects if the tax system were less heavy on labor,” said Andrés Fuentes, an economist with the OECD in Paris.

Yet the perception of tax cuts in the country’s political mainstream ranges from slightly shameful to outright evil. Many conservatives see them as overindulgent toward voters, while the center-left views them as morally indefensible gifts to the rich. All parties, with the exception of the pro-business Free Democrats, favor a high degree of redistribution.

“You need high taxes in order to be civilized,” said Sven Giegold, who represents Germany’s Green Party in the European Parliament. “We are very far away from the government having too much money.” The federal audit office, meanwhile, has expressed concerns about the fiscal challenges of providing for an aging population and infrastructure investment.

Only one-fifth of Germans think the federal surplus is reason to cut tax, according to a poll in July by Infratest Dimap. More than half said the government should spend the money on investments, and another fifth wanted to pay down the national debt faster.

Germany’s gross national debt amounted to 65% of GDP last year, compared with 97% for France, 108% for the U.S. and 240% for Japan, according to the IMF. The national debt is expected to fall to 50% of GDP in Germany by 2022, while that in the other countries is expected to drift down very slowly or — in the case of the U.S. — to rise.

Yet even the German Taxpayers’ Association has said the focus should be on repaying debt, though it has called for some limited tax cuts.

The stigma around tax cuts means not just the federal government, but also towns small and big up and down the country are awash in money — and not always sure what to do with it.

In Eschborn, a town of 22,000 near Frankfurt with EUR212 million in its coffers, Mayor Mathias Geiger recently proposed to local officials a tax cut for businesses. The town council rejected it. The urge to save, Mr. Geiger observed philosophically, is anchored “deep in the German soul.”

To be sure, taxes in Germany, as in other European countries, cover a range of highly popular social benefits, including universal health care and state pensions. The last time income-tax rates dropped in a big way was under Ms. Merkel’s predecessor, Chancellor Gerhard Schroeder, who cut taxes in the early 2000s in a bid to boost a then-stagnant economy. Most individual income over EUR54,000 is effectively taxed at about 44% for single taxpayers, with a surtax on earnings over EUR256,000.

Germany’s corporate tax rate has fallen to around 30% from more than 55% in the late 1990s. But that level will soon be the highest among the Group of 7 major economies, potentially putting German companies at a disadvantage in international markets.

The growth rate of Germany’s capital stock is falling behind that of the U.S. and France, and even lagging behind Italy’s by some measures, says Guntram Wolff, director of the Bruegel think tank in Brussels. Incentivizing corporate investment should be a priority for the next government, he said.

Corporate-tax cuts are deeply unpopular, however. “The social discourse is, if you cut corporate-tax rates further, it’s basically a race to the bottom,” Mr. Wolff said.

EBM Papst, a manufacturer of electric motors in the southern German region of Baden-Württemberg, plans to take advantage of lower U.S. taxes to expand its North American footprint. But because of taxes at home, its chief executive, Stefan Brandl, worries about being at a disadvantage to his American competitors.

“A new German government should see it as important to support firms and not burden them with bureaucracy that weakens the competitive situation, ” Mr. Brandl said.

Andreas Povel, a former general manager of the American Chamber of Commerce in Germany, says German politicians “are in an extraordinary comfort zone” that blinds them from the need to keep state spending in check. German firms are likely to invest more in the U.S. to take advantage of the recent corporate-tax cut there rather than at home, Mr. Povel said.

Back in Eschborn, work is about to start on a new building for emergency services, a sport hall, a youth center, and an expansion of the public swimming pool. An expansion of the town hall and a new convention center will have to wait until staff can process them.

“We don’t have many millionaires here, but the town itself is a millionaire,” said Mr. Geiger.
Source: Dow Jones