Kohl Says Tax Hike Needed to Boost East's Weak Economy
SAYING that Bonn underestimated eastern Germany's economic crisis, Chancellor Helmut Kohl and his coalition partners have outlined a tax-increase package for the country, the highest overall increase in modern German history. The move contradicts Mr. Kohl's pre-election campaign statements, but his finance minister and others in the government argue it is needed to pay for reunification, aid to Eastern Europe, and the Gulf war.
Although the package is expected to raise an extra 48 billion marks ($32 billion) for 1991 and 1992, it will likely have a dampening effect on German economic growth, says Peter Pietsch, an economist with Commerzbank in Frankfurt.
The tax package is built around a one-year personal income and business tax increase of 7.5 percent, beginning July 1. It also includes hikes in levies on gasoline, heating oil, insurance, and possibly tobacco. The tax on leaded gasoline, for instance, will go up by 25 pfennig (16 cents) a liter and on unleaded gasoline by 22 pfennig (15 cents) - also as of July 1.
For now, the value-added tax on goods and services in Germany, at 14 percent, will not be affected, though Finance Minister Theo Waigel foresees an increase to 15 percent in 1993 to harmonize the tax with European Community standards.
Germans have come to accept that tax increases are unavoidable, but the size of this increase has caught many by surprise and elicited strong criticism.
``I don't believe it was necessary to increase taxes by such a high amount,'' says Mr. Pietsch. ``The German economy is still in a very favorable situation and can live with this increase,'' but Bonn should have been more vigilant in budget cutting.
Because of the tax increase, Pietsch doubts Germany can achieve the bank's pre-tax forecast of 3 percent economic growth this year. He thinks growth may slow by as much as half a percentage point, to 2.5 percent. (Last year, the economy grew at the lightening speed of 4.6 percent.) But, he says, the slower growth will help brake the inflation that comes with a tax hike.
Bj"orn Engholm, designated chairman of the opposition Social Democrats, called the package ``unsocial,'' because taxes were being increased ``for the masses'' while the government is sticking to earlier plans to cut wealth and business capital taxes.
The premiers of all of Germany's states are meeting today with Kohl, when it will probably be decided that the eastern states will receive a larger share of the value-added-tax revenues than had previously been allotted.
In other financial news, Germany unveiled its draft treaty on European Monetary Union in Brussels on Tuesday. It said the creation of a European central bank, or Eurofed, should be delayed until 1997. All 12 members of the European Community, according to Bonn's draft treaty, must also agree before the decision is made to enter the final phase of monetary union, which would usher in a single European currency.