By Tom Fairless
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.
--Todd Buell in Frankfurt contributed to this article.
Write to Tom Fairless at tom.fairless@wsj.com
(END) Dow Jones Newswires
February 17, 2018 07:14 ET (12:14 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.