Higher German Taxes Unnecessary as Surplus Grows, Institutes Say

Germany’s next government won’t need to raise top income-tax rates to ease burdens on lower earners and pay for infrastructure spending, the nation’s top economic institutes said, contradicting opposition demands.

Germany’s budget surplus will widen to 0.3 percent of gross domestic product in 2014, or 7.7 billion euros ($10.5 billion), from 0.1 percent of GDP this year, which equates to 3 billion euros, the institutes said in a twice-yearly report.

“With a continued moderate expansion of government spending, significant surpluses in the budget can be achieved in the medium term that create scope to reduce bracket creep while at the same time not neglecting public investment spending,” the institutes said. “Raising the top tax rate isn’t required in this context with a view to its fiscal effects.”

By advising against higher taxes, the institutes are siding with Chancellor Angela Merkel, whose Christian Union bloc is holding exploratory talks with the opposition Social Democrats about forming a coalition. Merkel regards her commitment not to increase taxes as one of two red lines in talks with the SPD.

Germany’s top income-tax rates are 42 percent for those earning from about 53,000 euros and 45 percent for those earning 250,000 euros or more.

The SPD wants the 42 percent rate to climb progressively for those earning 64,000 euros or more until 100,000 euros, at which point a rate of 49 percent would kick in. The party also wants to levy a wealth tax. The party says 5 percent of earners would pay more tax.

Negotiators from Merkel’s bloc and the SPD are scheduled to meet for a third round of preliminary talks at 3 p.m. in Berlin today. An SPD party congress is due to meet in Berlin on Oct. 20 to give the go-ahead or reject formal negotiations on a possible coalition with Merkel to govern Europe’s biggest economy.

Avoid Burdens

Taxpayers would adapt to increased taxes and seek to avoid higher burdens, damping the revenue effects from a higher top tax rate, the institutes said. Higher taxation would also limit incentives to work, resulting in reduced labor supply, growth and income. Any budget gaps should be closed by cutting subsidies, the institutes said.

Ferdinand Fichtner, an economist at the DIW institute in Berlin, told reporters the institutes agree that a German blanket minimum wage of 8.50 euros per hour would be damaging for the economy as a whole and prompt job losses especially in the country’s eastern half, where a quarter of workers are currently paid less.

SPD members have said a minimum wage at that level is a condition for participation in a government.

The leading institutes comprise Berlin-based DIW in cooperation with Austria’s Wifo, Munich’s Ifo in cooperation with Zurich’s KOF, Halle’s IWH in cooperation with Kiel Economics and Essen’s RWI in cooperation with Vienna’s IHS.

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