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Germans plan more tax reforms

By MARTIN WALKER, UPI Editor

WASHINGTON, Dec. 22 (UPI) -- Germany is bracing for a new round of tax cuts and further reforms in the New Year designed to haul the country out of the economic doldrums.

Fresh from the hard-fought compromise with the opposition parties last week for an initial package of reforms, both Chancellor Gerhard Schroeder (a left-of-center Social Democrat) and the conservative opposition leader, Edmund Stoiber, called over the weekend for further cuts designed to simplify Germany's complex tax system.

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"I'm for sitting down with the Christian Democrats and working out a deal to make our tax system less complicated," Schroeder told the Bild am Sonntag.

In an interview with Die Welt am Sonntag, Stoiber said "Hardly anyone has a chance of understanding our tax laws, and we plan to radically change that."

The Social Democrats propose to cut taxes from the current 19 percent to 15 percent in the lowest tax bracket and from 48.5 percent to 42 percent in the highest tax bracket.

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The Christian Democrats, the largest opposition group, are pushing a more sweeping reform approach. Dubbed the Merz plan after its author, the party's deputy leader Friedrich Merz, it seeks a simplified but steeply progressive tax, creating three tax bands of 12 percent, 24 percent and 36 percent, depending on income. The first $9,906 of income would be tax-free.

The Christian Democrats go much further down the road to simplification, proposing to scrap all tax breaks and exemptions, including the popular subsidies for commuters, a politically risky approach.

German business leaders say they don't mind which approach is adopted, so long as the tax cuts come to bring relief for an economy that has languished at the bottom of Europe's growth tables for the past seven years. With unemployment stubbornly stuck at 10 percent (close to double U.S. and British levels), the German economy is widely described in the local media as "the sick man of Europe." Its combination of generous welfare payments, high taxes and unemployment and almost zero growth is now known in Europe as "the German disease."

"A further tax reform in the new year is imperative," commented Michael Rogowski, the head of the Federation of German Industries. "For the next 3 years, we can't let ourselves take a break," he told the Berliner Zeitung newspaper.

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The problem is how to pay for the new tax cuts. Part of the problem has been the high cost of trying to integrate the former East Germany into the Western economy, and to level the massive pay disparities in the past 14 years since the fall of the Berlin wall in 1989. Through special "solidarity taxes" amounting to a 5 percent income tax surcharge, the West has pumped almost $1,000 billion into the East, with only disappointing results. Unemployment in the former East Germany remains double the level in the West.

Last Friday, after months of haggling between Schroeder's government and the conservative-controlled upper house of the German parliament, a watered-down reform package was passed. The planned tax cuts were slashed in half to about 0.5 percent of German gross domestic product, because the Conservatives refused to finance the cuts by plunging the country's finances even deeper into debt. As a result, the government is now to sell off some of the "family jewels" -- the state-owned Deutsche Telekom and Deutsche Post holdings in order to finance the reforms.

Given the political difficulty in enacting reforms, many of them bitterly opposed by the labor unions who are the mainstay of Schroeder's party, the emerging consensus for a new round of tax cuts and reforms in the new year points to the mood of desperation as the Germany economy continues to limp along.

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In addition to his call for more tax reform, Schroeder also announced Sunday an "innovation offensive" for 2004, arguing that Germany needed to step up investment in high-tech growth sectors areas like biotechnology and information and communications technology.

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