TIME EUROPE
July 24, 2000, Vol. 156 No. 4
The Tax Break Man
By squeezing through sweeping reforms, Chancellor Gerhard Schröder has stolen a march on his critics
By CHARLES P. WALLACE Berlin
What a difference a year makes in German politics. Last summer, the opinion polls for Chancellor Gerhard Schröder's Social Democratic Party were threatening to fall off the page. The party was soundly defeated in five straight state and local elections. The reason? Popular discontent over government plans to slash expenditures and reduce debt. It seemed as if Schröder's time in office might be cut as fast as the budget.
Last week, however, Schröder pulled off a major victory. Confounding his critics, Schröder at the last minute garnered enough votes to push through what many consider to be the most significant overhaul of Germany's tax system since World War II. The plan will slash corporate taxes from 40% to 25%, eliminate capital gains tax on the sale of stock by corporations, and cut the top rate of personal income taxes from the current 51% to 42% in 2005.
"This marks the end of Germany as a high tax location," said Holger Schmiedling, an economist at Merrill Lynch in London. "It means that Germany will be much more attractive as a place for outsiders to invest, and also means that Germans will have less incentive to invest their own funds overseas."
Finance Ministry officials said Schröder brought around doubters in the Bundesrat, the upper house of parliament, by agreeing to two important compromises: dropping the upper income tax limit a further point from 43% to 42%, and granting a one-time tax break for mid-sized companies — the famed Mittelstand — that allows owners to sell them and pay no taxes.
"Germany is once again playing in the first league," said Finance Minister Hans Eichel. Friedrich Merz, leader of the opposition in parliament, complained that the legislation helps bigger companies at the expense of small firms. "The differences in taxing enterprises and entrepreneurs changes the structure of the German economy to the disadvantage of the Mittelstand," he said.
Perhaps the most controversial part of the tax reform abolishes capital gains tax on the sale of shares by corporations. In the past, Germany has been dominated by a few big companies, such as banks and insurance companies, that held cross holdings in other big corporations. The capital gains tax was an effective bar to selling those stakes. "The end of the capital gains tax will help to unblock the restructuring of Germany that has been in the pipeline," said Thomas Mayer, chief economist at Goldman Sachs in Frankfurt. It was unfortunate that the government had to agree to a one-year delay to win passage of the measure, Mayer said, "but a delay is much better than no deal at all."
Schröder might have failed to push through his reforms if the opposition Christian Democrats were not preoccupied with a campaign finance scandal that erupted last year when former Chancellor Helmut Kohl admitted receiving illegal secret contributions. Ironically, Kohl's Christian Democrats had proposed their own tax cuts in the mid-1990s, but were blocked by spd leftists. If there is one sure thing in politics, it's that a tax cut is so popular that every politician wants to claim it as his own.
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July 24, 2000
COVER
One Is 100
Famous and beloved for her entire adult life, the Queen Mother notches up a century on August 4 — and the celebrations are already in full swing
EUROPE
Crackdown
Moscow's powerful oligarchs feel the heat as Vladimir Putin's tax police and prosecutors continue to make life uncomfortable for Russia's big business
The Hit List
Russia's ruble rousers
Q & A
Berezovsky speaks
The Tax Break Man
By squeezing through sweeping reforms, Chancellor Gerhard Schröder has stolen a march on his critics
BUSINESS
Third Generation Gap
Lower-than-expected bidding for mobile licenses is bad news for governments but good news for consumers
Names in Waiting
The trial is over — now judgment day looms for Lloyd's and investors
HEALTH
The New Science of Alzheimer's
Racing against time — and one another — researchers close in on the aging brain's most heartbreaking disorder
SOCIETY
The French Disease
In France, a best seller exposes a nationwide problem of emotional abuse in the workplace
THE ARTS
In Praise of Flattery
How the rampant sucking up to the famous has undermined the language of private praise
You Look Marvelous!
Tips for kissing up
Irony Is Dead. Long Live Irony (on the Web)
The snide tradition of disrespecting media and movie stars is thriving on delightfully sardonic sites
DEPARTMENTS
Essay
Olympic Monitor
World Watch
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