Commentary: German Companies Have To Kiss Welfare Goodbye, Too

Social Democratic Chancellor Gerhard Schroder and Finance Minister Oskar Lafontaine are floating a tax plan that drives some German executives ballistic. Allianz, Europe's largest insurance company, says the changes will cost it $1.42 billion in extra taxes over four years. CEO Henning Schulte-Noelle threatens to move businesses outside of Germany. RWE, the giant utility, says it may have to cancel a mining project that promised at least 14,000 jobs. CEO Dietmar Kuhnt claims the energy industry's taxes will rise by $14 billion.

Hang on. This is not just another leftist attack on Corporate Germany. These companies are opposing tax cuts that are, in many ways, good for the economy. To boost investment and create jobs, Schroder and Lafontaine want to bring the overall corporate tax rate from 45% to under 30%.

UGLY TRUTH. So why are the industrialists whining? Dire predictions to the contrary, this flap is about long-coddled industries clinging to privileges. Traditionally, the nominal tax rates have been high, but industry has benefitted from myriad loopholes. Utilities and insurers have gained the most from tax laws that let them set aside generous reserves that hide profits and reduce tax bills. So behind the outcry is strict self-interest.

If this is how Corporate Germany reacts to a pretty sensible plan, then there's little hope for the consensus needed to kick-start the economy. To finance hefty cuts in corporate taxes, Schroder has to close expensive loopholes. He also wants to make the system more transparent and rid it of privileges. It's hardly a radical approach. Yet the howls from the utility and insurance lobbies reveal the ugly truth: The corporate sector is just as tied to welfare-state perks as any unionized miner or auto worker.

What these giants of industry don't seem to understand is that hiding behind opaque accounting practices is no longer feasible in today's global economy. The only answer is learning to compete. And it's not just the German government that's forcing change. The European Union demands utility deregulation--23% of the German power market must be opened by this year, 33% by 2005. Big corporations are already free to solicit bids and knock down prices. Small companies and consumers still pay among the highest prices in Europe. Utilities should drop the rearguard action and get on with restructuring.

Meanwhile, life insurers enjoy a monopoly on tax-deductible pension products--and have fiercely resisted government moves to open this business to banks and other players. That's a mistake. Opening the pension industry will lure more savings into the market and into other investments--and create more opportunities for insurance companies.

By fighting tooth and nail against parts of the proposed tax changes, these corporate heavies risk destroying one of the government's most promising moves to reverse the economy's slide. "They are playing a dangerous game," says Brian Shea, an insurance analyst for Salomon Smith Barney in London. It's time for companies to cut the crocodile tears and accept new economic realities.

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