A week later, VAT is actually being discussed in Germany. The reason is a push by the FDP parliamentary group for a fundamental tax reform. In a paper by the parliamentary group executive, the Liberals announce that they will draw up proposals for reducing income tax. In order to be able to finance such relief, they propose the elimination of exemptions from VAT and higher indirect taxes.
Even if these are only initial considerations, a controversial debate immediately broke out. The coalition partners objected. “The FDP’s proposal is not very helpful,” says the SPD parliamentary group’s financial policy spokesman, Michael Schrodi. “Lowering income and corporate taxes while raising indirect taxes and removing VAT exemptions is socially unfair because it is a bottom-up redistribution.”
The Greens have expressed similar criticism. “People with more money can make a greater contribution than people who are already having problems financing everyday family necessities,” said Greens parliamentary group leader Andreas Audretsch. “When financing justice and climate protection, a fair distribution of costs should be the guiding principle.”
The move also came as a surprise to the coalition partners. Although the Liberals regularly advocate tax cuts, they rarely – like the other parties when it comes to their requests – make proposals for counter-financing.
Nine pages, three sentences, a lot of trouble
The proposal by the FDP is also not a fully formulated concept. So far it is a draft of the parliamentary group executive committee, which still has to be decided by the entire parliamentary group. Three sentences in the nine-page paper, in which the parliamentary group executive formulates an answer to the billions in US subsidies, caused a sensation. In addition to the demand for more free trade agreements, easier immigration for skilled workers and faster digitization and the reduction of bureaucracy, the focus is on tax policy.
The previous selection of exceptions is not very conclusive and gives rise to discussions. Monika Schnitzer, Economy
The FDP parliamentary group refers to the high tax burden on companies in Germany in international comparison and calls for it to be reduced. In addition to corporate income tax, the Liberals are in favor of a lower income tax. In addition to employees, these also pay partnerships, often family businesses.
“The intensified competition between locations also makes it necessary to think about a revenue-neutral adjustment of the tax structure,” says the paper. In this legislative period, proposals are to be drawn up on how income tax can be reduced.
And then comes the sentence that is now causing so much discussion: “This could be counter-financed by higher indirect taxes, fewer exemptions from the normal VAT rate and a reduction in questionable tax reductions.” Indirect taxes include VAT and consumption taxes, for example on alcohol, tobacco or energy.
The FDP is accused on social media of wanting to increase VAT on food in order to reduce income tax for higher earners. The faction itself was also surprised at the discussion it triggered.
>> Read here: FDP calls for tax cuts in response to American subsidies
The deputy leader of the FDP, Christoph Meyer, emphasizes that they do not want to increase taxes on food in order to reduce income tax. “The reduced tax rate should of course be retained for basic needs,” says Meyer. Rather, one wants to discuss structural changes in the tax system.
Most EU countries have higher VAT
Lowering direct taxes, especially on income, and raising indirect taxes, for example on consumption, is a trend that has been observed internationally for years. And the sales tax rate in Germany is comparatively low at 19 percent. In almost all EU countries, the rate is more than 20 percent. The reduced VAT rate is usually seven percent.
According to economists, VAT has many advantages over other taxes. An increase or decrease affects all taxpayers and not just a select few. Also, the tax is not so easy to avoid. And, according to liberal economists at least, it is less of a locational disadvantage than high taxation of companies.
Most recently, the grand coalition under ex-Chancellor Angela Merkel (CDU) raised VAT from 16 to 19 percent in early 2007. During the corona pandemic, it was temporarily lowered for half a year.
According to the Federal Ministry of Finance, an increase in the standard tax rate by one percentage point would bring almost 14 billion euros. An increase in the reduced tax rate leads to additional income of three billion euros.
>> Read here: Is the coalition quarrel spreading?
In recent years, the Liberals have repeatedly spoken out in favor of putting certain exceptions to VAT under scrutiny. This could include the reduced tax rate for hotel accommodation, which was once introduced by the black-yellow coalition.
Exceptions for gastronomy and hotels are controversial
The exceptions to VAT have been discussed for years. But hardly anyone dares to make changes because there has been massive protest from the affected industry.
number of the day
14
billion euro
brings an increase in the standard tax rate by one percentage point.
Wirtschaftswiesen boss Monika Schnitzer thinks it makes sense to cancel the reduction in the VAT tariff in certain cases. “The selection of exceptions so far is not very conclusive and regularly generates discussions about who should and shouldn’t benefit,” she said. “Introducing a uniform system here without the abundance of exceptions would indeed be worth considering.”
>> Read here: Calculate value-added tax and sales tax easily
The economist and former economist Lars Feld, who advises Finance Minister Lindner, also defends the initiative of the FDP parliamentary group. It’s not about the seven percent on food, but about the tax subsidies, for example for restaurants or hoteliers, he explained. “Thus, putting reduced VAT rates to the test makes sense when it comes to sifting through the tax system with regard to distorting subsidies,” says Feld.
Are tax cuts affordable?
The Social Democrats are also open on these points. “The reduced rates for food and culture are untouchable for us as the SPD,” says Schrodi. But you can talk about the exceptions for gastronomy and hotels.
The reduction for gastronomy accounts for around three billion euros, for hotels 1.4 billion euros.
(Photo: imago stock&people)
However, if food and culture are excluded, removing the exceptions is of comparatively little use to the tax authorities. The reduction for gastronomy accounts for around three billion euros, for hotels 1.4 billion euros. The remaining exceptions are even smaller. However, the income tax cut desired by the liberals is likely to be in the double-digit billions.
>> Read here: Lindner is working on new tax relief for companies
The Schnitzer economy does not currently consider this to be realistic. “In view of the massive need for government spending and the debt levels that have increased in recent years, I see no scope for general tax cuts,” says Schnitzer. “I think an increase in indirect taxes is tricky, because it puts a relatively heavier burden on poorer households.”
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