German Leaders Look Ahead to the Next Round of Reforms

The ink was barely dry on Friday’s agreement approving far-reaching economic and welfare reforms and Germany’s political and business leaders were moving on and urging more measures aimed at lifting Europe’s largest economy out of the doldrums.

In two of Germany’s competing Sunday papers, Chancellor Gerhard Schröder, leader of the Social Democrat Party, and Edmund Stoiber, the leader of the CSU, the Christian Democrat’s Bavarian sister party, called for negotiations and a compromise to simplify Germany’s incredibly complex tax system.

“I’m for sitting down with the Christian Democrats and working out a deal to make our tax system less complicated,” Chancellor Schröder told the Bild am Sonntag. Edmund Stoiber, in an interview with Die Welt am Sonntag, also placed a high priority on tax reform. “Hardly anyone has a chance of understanding our tax laws, and we plan to radically change that,” he said.

Should Germany’s various political parties reach an agreement in the new year, the changes could go into effect as early as Summer 2004.

Next up, tax reform

Both the SPD, the Social Democrats, and the CDU, the Christian Democrats, have proposed ways to simplify Germany’s tax system. Now it’s a matter of hammering out the differences.

The SPD has proposed cutting taxes from the current 19 percent to 15 percent in the lowest tax bracket and from 48.5 percent to 42 percent in the highest tax bracket. The CDU, however, has a far more radical approach, which was proposed by their deputy leader Friedrich Merz at the party congress in Leipzig in early December. Since dubbed the “Merz Plan”, it would establish a simplified progressive tax, creating three tax rates: 12, 24 and 36 percent. The first €8,000 ($9,906) of income would be tax free.

At the heart of the CDU tax scheme is their proposal to do away with all tax exemptions, including subsidies for commuters. The latter has proven controversial.

Business leaders urge the government to make more changes

The heads of Germany’s two major political parties weren’t the only ones calling for more reform. The country’s business leaders also made their opinions known. Among them was Michael Rogowski, the head of the Federation of German Industries. He told the daily newspaper, the Berliner Zeitung, that a substantive tax reform in 2004 was imperative. “For the next three years, we can’t let ourselves take a break,” he said.

On Friday, the German parliament passed a reform package, including a €8.9 billion ($11 billion) tax cut and a series of bills which will restructure the welfare system. In addition to voicing support for tax reform, Chancellor Schröder also announced an “innovation offensive” for 2004, telling the Bild am Sonntag that Germany needed to improve in areas like biotechnology and information and communication technology. One down, and Chancellor Schröder and company are moving on.