A little tax here, a little tax there

The German politicians have finally formed a coalition. What did they agree on? Screwing the taxpayer.

What has Germany’s business leaders angered most is the plan to raise the sales tax in 2007 by three points from 16 per cent to 19 per cent. That’s one of the biggest tax hikes in the history of the country.
Merkel and her conservatives had campaigned to raise the sales tax to in turn lower non-wage labor costs to spark growth in Europe’s largest economy. As of now, however, the plan is to use as much as two thirds of the revenue to lower Germany’s huge federal deficit. Economists have calculated the tax hike to bring roughly €24 billion (US$28 billion), but argue it will hurt already weak consumer spending and thus slow down or even reverse growth.

So a tax hike just sucked up by more government spending. No surprise there.
But I think it is worth noting that the CDU’s campaign proposal “to raise the sales tax to in turn lower non-wage labor costs to spark growth” is not obviously workable. Germany’s tax system imposes substantial non-wage costs on hiring labor, thereby reducing the demand for labor and lowering employment. But a switch to VAT means that labor demand increases, but labor supply falls. For a given wage paid, an increase in VAT means that the value of the wage falls. A drop in the supply of labor lowers employment too.

Of course, none of this matters, because the German government has figured out a way to fix the whole mess.

The conservatives in turn had to swallow a so-called “rich tax,” which includes taking more money from the affluent. Individuals making more than US$292,000 will have to pay up to 3 per cent more in taxes.
Taxing the rich always solves the problem, especially since none of them would ever think of moving to, say, lower tax Ireland.