Germany’s governing coalition may be poised to increase the value-added tax (VAT) by two percentage points to 21 percent, according to Marcel Fratzscher, President of the German Institute for Economic Research (DIW). The potential tax hike is being considered as a way to address budgetary shortfalls.
Fratzscher stated that both parties in the coalition – the Union and the SPD – have established “red lines” and appear unwilling to compromise. “The Union rejects tax increases, while the SPD does not want to cut back on the social state. Neither wants to reduce subsidies,” he told the Redaktionsnetzwerk Deutschland (RND). He anticipates the coalition will opt for the VAT increase, which he estimates would generate an additional 30 billion euros.
However, Fratzscher cautioned that such an increase would be “socially fatal,” disproportionately impacting individuals with lower incomes. He acknowledged it is a “politically comparatively convenient way” compared to other available options.
Alternative Revenue Streams Proposed
To close the budget gap, Fratzscher suggested both tax increases and subsidy reductions are necessary. He once again advocated for measures targeting the middle and upper classes, including a significant increase in property tax as a substitute for a wealth tax. He noted that Germany taxes wealth at a lower rate than other industrialized nations.
Fratzscher also expressed concern about Germany’s long-term economic growth, stating that the “growth engine” will not recover due to demographic changes and a lack of available workers. He believes tax increases and subsidy cuts are unavoidable.
Specifically, Fratzscher called for the elimination or reduction of tax subsidies he deems harmful to the climate, including those for diesel fuel, kerosene and commuters. He estimates these cuts could save 60 billion euros. He also suggested abolishing the “Ehegattensplitting” (marriage split) tax benefit, which costs the state around 22 billion euros annually, and replacing it with a “Realsplitting” system.
Fratzscher proposed abolishing “Minijobs” – low-wage, social security-exempt jobs – arguing they create disincentives for full-time employment. He suggested limiting these jobs to students and pensioners.
Frequently Asked Questions
What is driving the need for these financial adjustments?
According to Fratzscher, budgetary shortfalls are the primary driver, with a gap of over 130 billion euros anticipated between 2027 and 2029.
What specific groups would be most affected by a VAT increase?
Fratzscher stated that a VAT increase would disproportionately affect people with lower incomes, describing it as “socially fatal.”
What alternatives to a VAT increase are being considered?
Fratzscher proposed increasing property taxes, reducing climate-harmful subsidies (such as those for diesel, kerosene, and commuters), abolishing the “Ehegattensplitting” tax benefit, and eliminating “Minijobs.”
Given these proposed measures and the stated unwillingness of coalition partners to compromise on their core principles, what impact might these economic shifts have on the German public in the coming years?
