Schr?der’s tax plan

Am I the only one here that thinks Gerhard Schroeder’s making himself look like a bit of a goon with his condescending lectures to east European countries that they’d better raise their taxes… or else?

Here’s an issue that’s been quietly bubbling for some time, at least here in Prague. Either both sides have raised the rhetorical notch a level, or the media’s just starting to pay attention. In an interview with The Slovak Spectator, Slovak finance minister Ivan Miklo? puts it nicely: “The fact is that many European states should make structural reforms like those that we are now carrying out in Slovakia if they want to prosper…”

In other words, yeah, tax harmonization, great idea! So let’s start with France and Germany lowering their taxes! Ha.

To be fair, Schroeder and Chirac may have a point. I don’t pretend to know enough about EU tax law — or tax law in general — to know whether it’s a valid one. Basically the Franco-German logic is, “OK, so the Slovaks are free to offer a low corporate tax rate. Well, Germany’s free to stop giving so much money to the Slovaks.” The question to me is whether these things are apples and oranges, or even whether the Hungo-Slavic bloc really cares than much about EU structural funding. (And to be completely honest, my eyeballs started to glaze over about mid-way through the Spectator article, so if somebody can distill things a bit better than this, I’d be a happy camper.)

In any case, considering the Schroder-Chirac tax harmonization plan has a snowball’s chance in Cyprus of going through — at least according to this Business Week piece — you’d think they’d adopt a different rhetorical strategy. (I could be biased in that regard, because I do genuinely think Western European tax rates are simply too high.)

Most concerning is that Germany and France (and Scandinavia, too) seem to be acting out the caricature so often ascribed to them by the Anglo-American right.(See this European Voice article posted on the site of the American Enterprise Instritute: “Schr?der tax plan dubbed ?economically illiterate’.“)

19 thoughts on “Schr?der’s tax plan

  1. “German business confidence dipped slightly in May, reinforcing the view that growth in the eurozone’s biggest economy is likely to remain subdued for some time to come.” – from the Financial Times posted 25 May.

    Have to blame someone.

  2. Scott,
    that’s rich, turning to a republican think-tank for a quote about economic illiteracy.

    If you believe that western European taxes are too high, what services would you cut/shift into the private sector ?

  3. “A Republican said it, therefore it must be wrong.” Now THAT’S rich!

    I don’t know enough about the German budget to answer your question, but I thought it was more or less accepted that Germany needs some sort of fiscal reform. If you want to argue against that conventional wisdom, go right ahead, I’d be happy to listen.

  4. Patrick,

    before we start hacking away at social services in Germany, perhaps a few subventions could be done away with. It’d be a start, anyway.

  5. Scott,
    When it comes to economic matters,
    Republicans have a twenty-five year track record of using bogus (read supply-side0 economics in order to justify restructuring the U.S. tax system to benefit themselves.

    I’ve read somewhere that one of the main reasons that the U.S. tax load is so much lower than France is because much of our services (Health care, Pension, etc.) are handled by the private sector rather than the public sector. Not necessarily to our net benefit. If you take those into account, then the difference is almost neglible.

    You can argue that all three need reform, but focusing strictly on tax rates as opposed to the programs paid for by that tax revenue is intellectual laziness, at best.

  6. Mrs. Tilton,
    before we start hacking away at social services in Germany, perhaps a few subventions could be done away with. It’d be a start, anyway.

    You are in a much better position to judge what is excessive about German government spending than I. So is Scott, I suspect.

    But cutting revenue by reducing taxes without being explicit about what services will be cut to rebalance the budget is a recipe for fiscal disaster.

  7. Folks here interested in international comparisons of tax systems and burdens may like to try these links to highly reputable, independent sources:

    OECD: Total tax revenue (including social security) as percentage of GDP 2001 – with 2002 estimates:

    Isabelle Joumard: Tax Systems in European Union Countries (OECD Working Paper No 301):$FILE/JT00110384.PDF

    The Economist of 8 May did a Special Report on Structural reforms in Germany but it is subscription only.

    Overall, Germany’s tax burden as a percentage of GDP compares favourably with Britain’s but then Germany’s budget balance as a percentage of GDP is currently – 3.7 per cent compared with – 2.9 per cent for Britain. Part of Germany’s competitiveness problem is significantly higher employment costs compared with its main trading partners. Another part is institutional employment “rights” which make it inordinately difficult for employers to reduce payroll numbers with the result that employers are very cautious about taking on additional employees unless very confident that any increase in product demand is likely to continue.

  8. Well, France has been lowering its income taxes since the late 1990s. Of course they also keep increasing sin taxes, etc., so these might off-set each other. Anyway, I think its generally agreed that Germany and France’s main problems (Italy too) is their rigid labor markets. Germany also a problem that France (thankfully) lacks; its university system has gone to pot.

    Anyway, I think Germany has far more problems than France; France appears to be able to create significant growth rates – which explains why they were (to the shock of everyone) the EU growth engine in the late 1990s and why their recovery has been much better so far. The liberalization forced by the EU on France has been really good for it; and will continue to do it favors (see recent Alstom news).

  9. Patrick, Patrick, Patrick. Tsk. This sort of off-hand dismissal is unbecoming of you… :^)

    ?I would have no problem pushing the switch while having my dinner. We’re all going to die anyway, so it should be called the early death penalty.? ? John Malkovich

  10. I’d say that the least painful “points of attack” in the german economy are the coal mine subsidies (I’m with the french here. Who needs coal when you’ve got fission?), the retirement age, and south-german female labormarket participation.
    General labor-market reform would be immensely helpful, buhatwould be much easier o accomplish during an economic expansion.
    But actually I think that the german economy is going to grow quite a bit over the next couple of years. A very large economic boom in eastern europe looks fairly certian, and Germany should benefit a great deal from that, what with it’s heavily trade oriented economy and location.

  11. A report recently out from the US Bureau of Labor Statistics charts “Indexes of hourly compensation costs in US dollars for production workers in manufacturing, 2002”:

    Chart 2 shows hourly compensation costs for production workers, which include employer social security contributions, to be higher in West Germany than in almost all of the other countries shown, including the US. The question is whether labour productivity is sufficiently higher in West Germany to compensate for that cost disadvantage. The high unemployment rate in Germany suggests that on average across production industries it is not.

  12. Excerpt from the AEI piece:

    What is so strikingly absent in this argument is a link between low-tax regimes and EU-funded infrastructure projects. Didn’t countries like Spain, Portugal, or Ireland also receive EU-funds for infrastructure? The new members are comparatively much poorer than those countries were back then, and still they should be denied any transfers for infrastructure development only because they favour liberal economic policies? Rotten morals, in my view. Btw, while continuing to fume against the low-taxing neighbours, Austria is slashing its corporation tax from 33% to 25% next year. As it turns out, the pain to the budget is not so great, since income taxes are a much more significant source of state revenue anyway.

  13. Sorry, here’s the extract missing in my previous comment:

    Schr?der told Focus magazine: ?In the central and eastern European countries there?s a certain expectation from enlargement ? ?we have low tax rates and wages, but infrastructure projects which we cannot finance ourselves, will be funded by the EU?. That is not the way to go forward. We need a sensible balance.?

  14. “If you want to argue against that conventional wisdom, go right ahead, I’d be happy to listen.”

    Google for Peter Lindert on this site and read the paper that?s referenced in the comments.

  15. As an Eastern European I ask Schr?der’s supporters to consider one thing: while you had more or less a market based economy we had central planning…for 50 years!

    We want to live like the rest of Europe and to catch up we have to allow our economies to grow and prepare for what seems to be an unavoidable all encompassing welfare system. We don’t have well-established large industries nor an over qualified work force. What we do have are entrepreneurs and competent people who need to be able to compete with the rest of Europe. Low taxes will at least give us a chance to compete on more or less equal terms.

    Somehow I doubt that 10 countries joined the EU just so they could be told to give up one of the few things that keeps our foreign investment and economic growth going: low taxes. As mentioned by others before me, why should we raise taxes? How about you lower yours? Try it, you might find it enjoyable!

  16. Bernard,
    Patrick, Patrick, Patrick. Tsk. This sort of off-hand dismissal is unbecoming of you… :^)

    Nope, calling Shroeder’s plan ‘economically illiterate’ is nothing more than an insult. And merited being answered in kind.

    The crux of the AEI’s Hassett is this:
    If you are going to harmonize taxes upwards, then newcomers [to the EU] would have no advantage ? and competition in Europe would be on infrastructure, where Germany has a clear advantage.

    This completely ignores newcomer’s advantage that German-contributed tax revenue would be used to build up their infrastructure.

    For Shroeder to demand that the newcomers choose betweem subsidies or tax-based competition, but not both is not economically illiterate, it’s entirely rational.

    Also, please note this portion of the Slovak Spectator article that Scott cited:
    Economic theory follows the Laffer Curve, which indicates that, if the tax burden exceeds a reasonable level, unwillingness to pay taxes grows among citizens and a grey economy develops.

    The Laffer Curve is the corner stone of “supply-side economics”, a very much discredited economic theory.

  17. Juri,
    You Might want to read Peter Lindert’s Why the Welfare State Looks like a free lunch (PDF) paper, before deciding that low-taxes are the ticket to future prosperity.

    why should we raise taxes? How about you lower yours? Try it, you might find it enjoyable!

    Because, if properly structured, high tax rates aren’t the economic drag you think they are.
    So you try raising your taxes, you might enjoy it as much as the Germans!

  18. Patrick: “So you try raising your taxes, you might enjoy it as much as the Germans!”

    As mentioned with citations, Germany’s overall tax burden as a percentage of GDP is presently much as in Britain although Germany has a larger fiscal deficit, sufficiently so to breach the Eurozone’s Stability and Growth Pact. The present problem is not the tax burden but labour market sclerosis because of excessive regulation, low rates of return on investment, and the relatively high costs of employing people compared with almost all its main trading partners, mainly because of relatively large employers’ social security contributions.

    On the low rates of return on investment in Germany, try:

    On Germany’s high employment costs in production industries, see Chart 2 in:

    For an alternative – and arguably more rigorous – analysis of globalization and social spending, try this by Paul de Grauwe and colleague:

  19. Additional links for avid readers on Germany’s flagging economy:

    The Economist: The German Economy

    BBC: The German economy shrank in 2003

    EU Commission: Germany’s growth performance in the 1990?s

    Germany?s Technological Performance 2000

    “More than 150 German economics professors have called for an ‘orderly postponement’ of economic and monetary union because economic conditions in Europe are ‘most unsuitable’ for the project to start.”

    Sources of growth in OECD countries

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