Germany To Phase Out Solidarity Tax
They say that there’s no such thing as a temporary tax hike. If so, the corollary to this maxim should be that there’s no such thing as a permanent tax cut.
The reality is that life isn’t quite as simple as that, and governments aren’t always as mean to taxpayers as is often made out (including by this commentator!).
We’ve had two examples of countries not living up to this rule of thumb in recent days and weeks.
In one of potential significance, Germany’s Christian Democrat Union (CDU) has proposed phasing out the far-from-beloved solidarity tax, which was introduced as a fiscal buffer when the East Germany’s basket case of an economy began to merge with the West more than 25 years ago.
Looking in from the outside, it would be hard to disagree with those who say that the solidarity tax has served its purpose. Aside from small remnants of the Berlin Wall, and the austere Soviet architecture in the city’s east, if you walked the streets of the German capital today without any knowledge of the city’s history, there’d few clues to its former divide.
Statistics do show that the East German economy still lags West Germany’s quite substantially. According to The Economist, in 2015, on the 25th anniversary of the fall of the Berlin Wall, GDP per capita in the East was two-thirds of that in the West, and unemployment was also significantly higher.
At the same time though, the same figures indicate that the economic lot of easterners has improved markedly since reunification, and in terms of infrastructure, the East is more or less up to Western standards. What’s more, as The Economist points out, Germany is probably no more economically divided between east and west now as Italy or the United Kingdom is between north and south. So maybe the “soli” has done its job.
On the other hand, there will be those who will argue that the CDU’s proposal is nothing more than a cynical election ploy, and that it shouldn’t be playing politics with such an important and symbolic measure. It could be said that the “soli” is more than a mere revenue raiser, and represents the spirit of solidarity between East and West.
But then it was never intended to be a permanent tax. So perhaps the CDU deserves some credit for breaking one of the fundamental unwritten tenants of taxation – “thou shalt not repeal a temporary tax.”
For more information on this, and other topical international tax matters, please visit: https://www.cchgroup.com/roles/corporations/international-solutions/research/global-tax-weekly-a-closer-look