Angela Merkel Channels Bush 41, to the Country’s Detriment

It’s the German equivalent of Bush 41’s broken “read my lips” pledge:

German parliament to pass biggest post-war tax hike
19 May 2006

BERLIN - Germany’s parliament was poised Friday to approve the biggest tax hike in the post-war era despite fears it could harm the country’s modest economic upswing.

Chancellor Angela Merkel’s grand coalition plans to raise value-added-tax to 19 per cent from the current 16 per cent as of January 1, 2007.

This and other measures are expected to yield the government a whopping 19.4 billion euros (24.8 billion dollars) in extra revenue next year.

Funds will be used to plug holes in the country’s gaping budget deficits which have overshot the eurozone limit for the past years.

But given that the move is expected to boost the average annual tax bill of a married couple by 560 euros, experts warn it could further dampen the already weak domestic demand in Europe’s biggest economy.

Analysts fear that economic growth, which is slowly picking up after five years of stagnation, could go back into a tailspin.

Eckart Tuchtfeld, a senior economist with Commerzbank in Frankfurt, said following expected GDP growth of 1.5 per cent this year, Germany’s economy would likely post only a sickly 1 per cent growth in 2007.

“Consumer prices will go up … and there will be zero growth in domestic demand next year compared with 2006,” he warned in comments to Deutsche Press-Agentur dpa.

Even Chancellor Merkel insisted during her election campaign last summer that “tax increases … would damage the economy. We will never do it.”

But she swiftly changed her tune after being narrowly elected in September.

There remains considerable public opposition to the tax hike.

No kidding?

And Ms. Merkel, if economic growth will contract with the tax increases, doesn’t that mean that economic growth would increase if taxes went down?

Unfortunately, maybe not in Germany. As discussed last September, the country has dug itself such a deep hole with its “untouchable” social-welfare commitments, combined with low birth rates, that it has little room to maneuver. Meaningful tax cuts that actually change behavior would have to drop the highest rates down in the mid-30s, and it appears Ms. Merkel’s coalition doesn’t have the stomach for that (it may also be that the hidebound EU wouldn’t permit it anyway).

As also stated last September, what is happening in Germany now is the future the US faces if it doesn’t reform its current 70 year-old Social Security and 40 year-old Medicare models.