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May 21, 2006
Germans Try Taxing Their Way To Prosperity

Faced with spiraling deficits and a moribund economy, Germany has once again decided that the government provides the answer to financial stress. The Bundestag passed the largest tax increase in post-war history and targeted the tax on retail transactions:

Parliament passed Germany's largest postwar tax hike on Friday. The country's value-added tax (VAT) will rise from 16 to 19 percent in January to help cut the deficit. But there are worries it will hit the already weak growth of the world's third largest economy.

Hoping to control a spiralling budget deficit, Germany's lower house of parliament, the Bundestag, on Friday passed the biggest tax increase in the country's postwar history. The new package calls for a 3 percentage point jump in the value added tax -- from 16 to 19 percent. Proponents want to raise about $25.5 billion more per year starting in 2007, but critics say the hike will dampen the nation's sluggish economy, which has begun a moderate recovery in 2006.

Germany faces pressure from its European partners to meet EU targets that the Germans have violated for the past four years. They need to bring their deficit under control in order to do this. Rather than wait for their modest recovery to increase tax revenues, or lower taxes on investment mechanisms, the Merkel government has decided to pull more money than ever out of the economy.

Taxes are nothing more than government confiscation. Governments require revenue in order to deliver the services desired by their citizens, but the withdrawal of funds from a market gives the market less resources to expand. Germans require a large number of expensive services, an entitlement scheme that puts more and more pressure on their economy as time goes on and fewer Germans contribute to it. The smarter move would be to encourage more investment in their economy rather than taking those funds out of it. Using the VAT as a mechanism for this effort gives a double penalty to the economy; it penalizes consumption, forcing people to keep their money out of the market and encouraging them to put money into static savings instead.

The Germans will likely regret their short-term solution to their long-term problem. The additional taxes will almost certainly grind their recovery slowly to a halt, and the Merkel government will once more be forced to find more revenue to make up the shortfall. Germans, thus far, show little willingness to consider a decrease in spending as the most obvious deficit remedy.

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Posted by Ed Morrissey at May 21, 2006 9:44 AM

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