Germany Tries GoreconomicsAl Gore famously remarked during the 2000 election that he would not raise taxes, unless something unforeseen, like a recession, occured. The Germans have decided to try Gore's method:
Accordingly, the new German Government has decided to impose one of the biggest tax increases in postwar history and to target the extra taxes on the weakest and most sensitive parts of the economy: consumption, which will suffer a three percentage point increase in VAT, and housing, which will lose tax incentives for first-time buyers. In addition, to fend off accusations that the new consumption taxes will bear unfairly on poorer consumers, the Government will hit the rich as well, increasing the top rate of income tax from 42 per cent to 45 per cent.
It seems that Angela Merkel’s idea of a compromise between the Christian Democrats, whose most unpopular idea was the VAT increase, and the Social Democrats, who were berated for demanding higher income tax, was to combine the most unpopular measures from both parties’ manifestos, while dropping all the rest.
Speaking to one of Germany’s most prominent economists a few days ago, I noted a decline of consumer spending in response to higher taxes is not just a theoretical possibility but a well-established empirical reality — demonstrated by widespread evidence from a large number of countries.
“Maybe,” he replied, “but the Germans are different. When taxes are raised in Germany, I can guarantee that consumers will become more confident and will spend more. You see, we Germans are today more worried about the deficits of our Government than about the incomes we receive.”Let's see, you have less money to spend in a time of economic uncertainty, so you're going to
increase your spending? You know how this goes; it is not axiomatic that increasing taxes worsens a depression or tempers a recovery. The Germans could get lucky like Bill Clinton did in 1993 and discover that the negative effects of a tax increase are outweighed by economic growth that was coming anyhow thanks to currency devaluation and low interest rates.
Hat Tip:
Captain's Quarters
