The Fiscal Reform in Germany

Résumé du document

The second chamber of the German Parliament, the Bundesrat, adopted on the 1th of July 2000 a wide fiscal reform. This reform is historical since it put an end to the 'Reformstau' (blocking of reforms) initiated by the former Bundeskanzler, Helmut Kohl, who had to face the period of the German reunification

Extraits

[...] Deceptions caused by such a reform Of course employers claimed that the decrease in corporation tax was far too insufficient, and people would have preferred a further reduction of the income tax. Yet, the major problem caused by this fiscal reform came from the economic context that has changed since the law was voted. Since the reunification the German economy has slowed down, but, by the time this reform was voted, Germany was facing quite an important economic revival (growth reached in 2000). Hence, the government expected growth to finance tax cuts all the more so that Germany had implemented a wide budgetary reform that aimed at reducing the budgetary deficit. [...]

[...] Yet the tendency seems to have changed. The IMF announced that expecting growth was far unrealistic. In fact Germany's economy lays close to recession. Although Gerhard Schröder promised that unemployment would have decreased to 3,5 thousand people by fall 2002, an amount of 4 thousand might be reached this winter. Since the government's tax cuts cannot be financed by growth, public deficit will reach this year and in 2002 which brings Germany quite close from the deadline of imposed by Maastricht criteria. [...]

[...] What is interesting to note is that this reform was initiated in a period of high growth. This means that the government aimed at conducting a pro-cyclical policy (reducing taxes when the national income increases and increasing taxes when growth declines so as to preserve the national budget). Since the fiscal reform was already voted, the change in the economic situation led the government to lead a contra-cyclical policy (increasing taxes when growth is high so as to gain money and decreasing taxes when growth slows down so as not to strangle firms and households and so favour an economic recovery). [...]

[...] This represents an average amount of 8 billion DM billion Concerning individuals: Marginal rates of the income tax are to be reduced by steps from 22,9% to 15% concerning the lower rate and from 53% to 42% as to the ceiling rate. The non taxable revenue has also increased from 6 to 7 which permitted many households to become non-taxable. All these measures will occur progressively until 2005. Such cuts represent 14 billion Purposes of such tax cuts Such a fiscal reform aims at promoting growth in Germany. The government forecast that such a reform will make growth increase by one point per year. [...]

[...] Such a measure will enable them to modernise and restructure widely the German economy. It will then be far less expensive for them to concentrate on their main activities and simplify their portfolios. These cessions of assets will constitute enormous non- taxed financial reserves which will be reinvested and hence will increase growth. The reduction of corporation taxes: This measure is expected to improve the firms' results in 2001 and hence make such firms gain stock value. The government forecasted that the shares of German firms should increase by 7 to and thus make the DAX30 gain 600 points. [...]