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Germany Could Use $55B Budget Surplus To Cut Taxes

Germany

Ever since president Trump unveiled deep tax cuts for American companies, Germany’s industries have been wracked with fears of their products becoming uncompetitive in the global marketplace. Consequently, many have repeatedly called for the lowering of the tax burden.

And now they have the perfect excuse to renew their calls for cuts after the public sector posted a record surplus 48.1 billion euros ($55 billion) during the first half of the year.

Indeed, there is a nice line-up of conservatives behind Chancellor Angela Merkel who are very keen to remove the “solidarity tax”, which dates back to the 1990 reunification when it was necessary to support poorer states in eastern Germany.

Key figures of Merkel’s Christian Democratic Union (CDU) and the Bavarian conservatives are fully in support of the planned phasing out the tax in 2021.

Not everyone is on the same page, though—most notably, the country’s finance minister, Olaf  Scholz, a member of the junior coalition partner Social Democrats. Scholz says the higher-than-expected surplus is a good thing because it gives the government extra room for maneuver, Reuters reported.

Tax Competition Heats Up

After a decade of stagnation, Germany’s tax code needs rewriting so as to defend its allure as a business location.

Politicians are acutely aware that the main pillars of the economy, including automobiles and chemicals, pay up to 60 percent of their income at home despite the fact that the domestic market contributes less than one-third of their sales. There’s a big risk that these businesses will start to relocate to tax friendlier regimes, which would obviously be a big blow to German’s tax coffers. Related: No College, No Problem: Silicon Valley’s Student Loan Solution

The Federation of German Industries (BDI) has urged Berlin to lower the overall tax burden, including trade and corporate levies, to a maximum of 25 percent--a percentage point lower than the U.S.’ 26 percent.

But this is not just about beating Trump at his own game.

Over the past two years, tax competition has reached fever pitch in the European Union. To wit, the UK plans to lower it’s already low 20 percent corporate tax to 17 percent, while France wants to reduce its rate from a hefty 34 percent today to 25 percent by 2022. Unless Germany takes action, it will remain stuck with the heaviest corporate tax burden not only in the EU but also among other industrialized nations at over 30 percent.

Fiendish System

Germany’s companies pay two types of taxes: trade and corporate taxes. The BDI has proposed a gradual reduction in corporate tax from 15 percent to 10 percent—quite a radical step given that the corporate tax in Ireland, reputed to be Europe’s lowest, is 12.5 percent.

The federation is also proposing changes in the assessment base for trade tax, which happens to be a fiendish system that allows a quarter of rental and leasing outlays to be added back to taxable income. Businesses, on the other hand, want trade tax credited against corporate income tax in a bid to reduce overall tax burden as was previously the case before 2008.

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But so far, tight-fisted Scholz has repeatedly deflected calls for tax cuts, claiming the country is competitive enough. Also, Berlin has an obsessive desire to balance its budget despite the country now enjoying one of the biggest economic boom in years.

Nevertheless, there’s some hope.

Scholz, together with his French counterpart, Bruno Le Maire, have agreed to establish an EU-wide tax assessment base that will harmonize the EU tax code and defuse growing European rivalry.

By Alex Kimani for Safehaven.com

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