The Tax Bite That's Holding Germany Back

If you're concerned about the impact of tax increases on the U.S. expansion, cast an eye on Germany, which has been enacting massive tax hikes in the midst of a recession. Economists at Salomon Brothers Inc. report that this year's rise in pension-insurance contributions will claim an additional 0.85% to the payroll-tax rate, bringing it to 9.6% of the taxable wage, and a new nursing-home-care scheme awaiting legislative approval would add a similar amount.

Along with an increase in gasoline taxes, these measures are expected to boost the average German worker's total tax rate this year to 45% of wages, from 44.1% last year and 40.1% in 1990. What's more, that rate is projected to surge past 47% next year, when a 7.5% income-tax surcharge is scheduled to go into effect.

With growing unemployment, real aftertax wages already down by 2.3% since 1990, and household savings rates approaching historical lows, the rising tax bite promises to undermine consumption and prolong the recession, say the Salomon economists.

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