Germany embarks on major tax reforms

BRUSSELS, JULY 20. Germany is embarking on epoch-making tax reforms and this is rated as a major political triumph for the Chancellor, Mr. Gerhard Schroeder.

It is argued that the old tax reforms will go only a part of the way to cure Germany's economic ills, as the country has yet to improve its labour laws and provide more flexibility in hiring and firing of personnel.

With the launch of the new tax reforms, there is a marked shift in the commerce and industry sector's sentiment and business confidence in the country.

The Social Democrats-Green Coalition victory in the upper House has broken the legislative logjam caused by the obduracy of Opposition Christian Democrats, who had a majority

in the House. However, since the ignominious fall of the former Chancellor, Mr. Helmut Kohl, from the leadership of the Christian Democrats, and the fast declining popularity of that party, there has been a marked change in the party's strategy.

The new generation of Christian Democrats is trying to meet the aspirations of the people and business for tax reforms. They are opposed to the high taxes prevailing in the country which are beginning to cripple domestic capital flows and competitive edge. Mr. Schroeder, who not long ago was rated as a poor leader, is suddenly in the limelight as he pushes the legislation on the tax reforms.

The proposed tax reforms will usher in major corporate tax changes and the basic corporate tax rate will fall to 25 per cent from the current 40 per cent. This does not include local trading levies. The abolition of capital gains tax on the sale of cross share holdings in next two years paves way for larger investments.

The company mergers and acquisitions activity will be boosted to consolidate and tone up German companies' financial strength and competitive edge. Germany also offers special tax incentives to non-incorporated companies and sole traders. The top rate of taxable income for high earning groups of individual tax payers will be gradually reduced. The highest rate for taxable income will not exceed 45 per cent in the next five years.

In the European financial capitals, these reforms are rated as both bold and pragmatic. The French and Italian media are looking at German tax reforms with envy and look enviously at future benefits to business.

Le Monde, the prestigious centre-left French daily, has praised the Government for succeeding in ``reconciling fiscal justice with support for investment and job creation.'' Italian commentators had argued that Germany was ``pulling ahead of Italy'' in wealth creation by initiating structural economic reforms and boosting industrial competitiveness. They urged Italy to follow the example.

What impact all this will have on the German unemployment rate and level of poverty remains to be seen. Germany's generous welfare system has helped to perpetuate poverty of the unemployed as many of the jobless do not have incentive to earn and retrain in vocations.

Analysts point out that the culture of ``less taxes and better productivity'' was introduced in the U.S. and Britain over a decade ago in the heydays of the Reagan-Thatcher rule. The view in financial capitals is that Germany is on the right path, but still has a long way to go to reap the full benefit of the low tax and high productivity culture.