German Parliament Approves Hefty Tax Hike

The Associated Press
Friday, May 19, 2006; 12:54 PM

BERLIN -- The German parliament on Friday approved a large increase in value-added tax, a plan aimed largely at curbing the budget deficit and seen by opponents as a threat to the country's hesitant economic recovery.

The plan, approved by the lower house on a 396-146 vote with three abstentions, will see VAT paid by consumers rise to 19 percent from 16 percent next January.

It is expected to raise about 20 billion euros ($25.5 billion) per year in extra tax revenue.

Observers worry the increase will dampen consumer spending that has barely begun to recover after years of stagnation, even as strong exports have propelled German growth.

Leading German economists have forecast that economic growth will slow to 1.2 percent next year from 1.8 percent in 2006.

"I know that we are asking a lot of people at the moment," Chancellor Angela Merkel said in an interview with the Sueddeutsche Zeitung released Friday.

She told the paper the revenue generated would be used to combat the budget deficit.

Merkel's government is committed to getting the deficit within a European Union-imposed limit of 3 percent of gross domestic product in 2007, after several years of overshooting the mark.

Germany's biggest-selling daily, Bild, headlined its Friday edition with a front-page appeal to lawmakers to "stop this tax madness."

"There is no such thing as a pain-free operation," Finance Minister Peer Steinbrueck told lawmakers as he defended the plan.

About a third of the proceeds will be used to cut payroll taxes paid by employers for unemployment insurance _ reducing high nonwage labor costs that are widely seen as a drag on Europe's biggest economy.

"If people say these are the biggest tax rises in history, one must also say that we also are approving today the biggest relief from nonwage labor costs, and I think that will have ... a positive effect for the employment situation," Michael Meister, a senior lawmaker with Merkel's Christian Democrats, told ARD television.

"We don't want a VAT rise for the sake of it, but we realize that the only thing that helps is looking reality in the eye, and so ... there is no alternative," he added.

The tax increase still needs approval from the upper house of parliament, which represents state governments.

Merkel's left-right "grand coalition" is comfortably in control of that chamber too, although some state officials have expressed misgivings.

© 2006 The Associated Press