Germany Needs Real Tax Reform

Germany certainly has come to a sad pass. In late July, the government of Chancellor Helmut Kohl and the opposition Social Democratic Party failed to reach agreement on tax reform after months of wrangling. That leaves Germany with corporate and personal taxes among the highest and most convoluted in the world. At this point, about the only thing preventing a total collapse of business investment in Germany is the low interest-rate policy of the Bundesbank, which has kept short rates at just 3% for almost a year. Now, even that edge is threatened. Fearful that the plunging mark may spark inflation, the Bundesbank is signaling that it may raise rates.

The tax package German politicians couldn't bring themselves to pass was pitiful to begin with. Companies fervently supported it mainly for its emblematic importance: Passing it would have meant the government at least had done something to improve the business climate. While the plan might have helped some midsize companies, many large companies, including Henkel, Hoechst, and BMW, say their taxes could have risen. Politicians, meanwhile, have failed to agree on spending cuts.

This is not at all what Germany needs. Finance Minister Theodor Waigel has promised to go back to the Social Democrats this fall and attempt to revive German tax reform. Well, he certainly should. And this time Gerhard Schroder, the Socialists' likely candidate against Kohl in 1998, should take a stand. What's needed is tax simplification and genuine cuts. The objective: to get foreign and domestic business investment flowing in Germany once again--and yes, create some jobs.