Flat Tax Hot in Germany

This time next month Angela Merkel will probably be Germany’s eighth Chancellor since the Second World War. Merkel is currently the leader of the Christian-Democrat opposition party CDU, a centrist party which (together with its more conservative Bavarian counterpart CSU) is generally expected to become the biggest party in the September 18 elections.

It depends on how large the loss of the governing Socialist SPD will be and how huge the gains of the post-Communist “Left Party” in the eastern Länder whether Merkel will be able to govern with the free-market Liberal FDP. If the FDP fails to gain the 5% threshold or if CDU/CSU and FDP do not get half the seats in the Bundestag, Germany will get a so-called “grand coalition” of Christian-Democrats and Socialists.

It is said that Merkel personally favours a coalition with the Liberals, but I am not sure if this is true. Merkel is an East-German (a so-called “Ossie”) and will not want to antagonise the predominantly left-wing East too much. Moreover, politicians are always more afraid of antagonising left-wing rent-seeking voters than people with an entrepreneurial spirit. Apparently those receiving state benefits are always pampered while the net taxpayers are coldshouldered. This, I think, is probably due to the fact that the politicians themselves are net receivers. Merkel seems to be no exception to this general political rule. Early last August she distanced herself from two of her own politicians who were said to have “insulted” the Ossies: CSU leader Edmund Stoiber had remarked that it would be unacceptable if the East were to saddle the West with a Socialist government yet again, while Joerg Schoenbohm, a CDU politician in the eastern state of Brandenburg, had declared that the loss of morals in the East was due to almost five decades of Communism.

Paul Kirchhof
In the wake of these two incidents the election campaign of the CDU/CSU team seemed to stumble, until Merkel delivered a master stroke in mid-August by putting forward a non-party member as her candidate for the ministry of Finance: the Heidelberg professor and lawyer Paul Kirchhof. The 62-year old Kirchhof is one of Germany’s most outspoken proponents of the flat tax, a fiscal system with only one tax rate for all personal income and corporate profits. This system was first introduced in Estonia in 1994 and has since been adopted in 11 countries, mostly in Eastern Europe, with booming economies as a result.

Kirchhof proposes to introduce a flat tax rate of 25% while abolishing the 418 loopholes in the German tax system. It is often quipped that German families need a fiscal adviser as much as a medical doctor because the German tax system is so complicated with its 90,000 tax rules. It takes “twelve Saturdays to fill in one’s tax forms,” says Kirchhof. He wants to reduce this “to ten minutes.” For twelve years Kirchhof was a judge in the German Constitutional Court in Karlsruhe, where he had to settle tax disputes. “Twelve years I have tried to repair a car that was beyond repair. This makes one want to bring a new model onto the market,” he explains. According to Kirchhof the German tax system is unjust because the rich can afford tax advisers, while less wealthy people cannot and subsequently pay more taxes than the rich.

Though the CDU/CSU programme does not envisage a flat tax and Merkel has made it clear that Kirchhof’s proposals do not bind her or her future government, Kirchhof seems to have touched a nerve with many Germans. Suddenly he became the hero of the ordinary Fritz Steuerzahler (Fritz theTaxpayer) and the flat tax has become the most important topic of the electoral campaign. A large part of last Sunday’s television debate between Merkel and Chancellor Gerhard Schroeder was devoted to tax reform.

The official CDU/CSU programme proposes the introduction of a tax free minimum of 8,000 euro per person, a progressive tax rate between 12 and 39% (currently between 15 and 42%) and a VAT rise. Kirchhof accepts the party programme as a first step in the right direction. He is confident, however, that his vision of a 25% flat tax (actually his proposal comprises a system with four rates: 0, 15, 20 and – generally – 25%) can be realised in a period of six years.

The German economy, which has long been the motor of Europe, has been spluttering for years with a rampant government deficit and five million unemployed, far more than when Schroeder and his red-green coalition came to power seven years ago. If a new German government can boost the German economy, this will be good news for all of us. Especially if Germany introduces a flat tax, which will force all nations in Western Europe to adopt a flat tax system.

For this to happen, however, it would be better for Germany if a coalition were formed with Merkel’s Christian-Democrats and the free-market Liberals than if there were a “grand coalition” with the Socialists. The latter reject the flat tax out of principle: they deem it “anti-social,” refusing to acknowledge that the rich would then pay more as all the loopholes of which they avail themselves now would be closed. Sadly, some left-wingers within the centrist CDU share this opinion. Kirchhof has already indicated that he does not want to be a minister in a coalition with the Socialists.

A second reason why a coalition of CDU/CSU and FDP is to be preferred is that it will lead to an improvement of Germany’s foreign policy. Under Schroeder the Socialists opted for a Franco-German alliance which opposed both the “Anglo-Saxon” influence in Europe and the interests of smaller European nations. The Christian-Democrats would want to normalise Berlin’s relations with America and Britain and with Germany’s non-French neighbours.

It is an unwritten rule in German politics that the Chancellor is always a member of the biggest party in the ruling coalition while the Minister of Foreign Affairs is provided by the junior partner. Hence, in a coalition with the FDP a Merkel cabinet is bound to have a Liberal Minister of Foreign Affairs, while in a coalition with the SPD the latter will be a Socialist. The CDU/CSU has announced that this time the unwritten rule will not necessarily apply. In fact, the party has two strong contenders for the job of Foreign Minister: Wolfgang Schäuble, the pro-American foreign expert of the Christian-Democrats, and the equally pro-American CSU leader Edmund Stoiber, the Prime Minister of Bavaria. Both men, however, have had strained relations with Merkel in the past, which makes it likely that the unwritten rule will prevail anyway. In a month from now we will know. If you ask me, the next German Foreign Minister will probably be a Socialist, but I hope I am wrong.