Will the flat tax ruin Germany's leading politician?

Will the flat tax ruin Germany's leading politician?

Will the flat tax ruin Germany's leading politician?

Moneybox
Commentary about business and finance.
Sept. 16 2005 3:12 PM

Das Flat Tax

The conservative economic proposal flopped with American voters. Now Germans are learning to hate it, too.

Angie Merkel: She's no Maggie Thatcher. Click image to expand.
Angie Merkel: She's no Maggie Thatcher

DÜSSELDORF, Germany—Will the flat tax do for Angela Merkel's campaign for German chancellor what it did for Steve Forbes' ill-fated presidential campaigns in 1996 and 2000?

Until recently, Merkel, the leader of the center-right Christian Democratic Union party, enjoyed a healthy lead over incumbent Gerhard Schröder, whose Social Democrats are listing after eight years in office and a growing national malaise.

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American conservatives hope that Merkel will turn out to be a Teutonic Margaret Thatcher: an up-from-the-bootstraps woman from a right-of-center party, an economic conservative who favors structural reforms of a bureaucratic welfare state. On everything from the war in Iraq to the potential accession of Turkey to the European Union, American conservatives had hoped that by electing Merkel, the German electorate would effectively abandon some of the policies that had recently put it at odds with the United States.

Merkel's lead has narrowed significantly as Sunday's election nears, a function of two dynamics familiar to people who follow U.S. political campaigns. First, Schröder has turned in effective performances in televised debates. And second, a flat-tax proposal has become a millstone around Merkel's neck.

The first clue that the flat tax is an unwelcome import: The Germans, who have a word for everything, don't have one for the flat tax. They call it the "flat tax."

As a childless professional woman from the East, Merkel is an anomaly in German politics. And she has conducted the campaign in an anomalous way. One of the radical things she did—a move that would strike U.S. voters as perfectly normal—was to look beyond political professionals for advice. In Germany, former CEOs and even academics rarely figure in campaigns or in governments. But Merkel brought on former SiemensCEO Heinrich von Pierer as an adviser. And in August, Paul Kirchhof, a former judge and professor at the University of Heidelberg, was enlisted as shadow finance minister. His task: to come up with a plan to kick-start Germany's large and lumbering economy into higher gear.

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The result has been a disaster. Kirchhof had long recommended a serious reform of Germany's progressive and deduction-riddled income-tax system, which has a top rate of 42 percent. His preferred plan is to rip up the tax code, institute a flat 25 percent income-tax rate, and make up for lost revenue by boosting the value-added tax. An analyst for Hypovereinsbank dubbed Kirchhof "the miracle worker."

The plan to reduce taxes on income and effectively boost taxes on consumption is unpopular in Germany for much the same reason it is in the United States—only more so. Germans tend to see progressive income-tax rates as part and parcel of a democracy. The notion that a secretary would pay the same proportion of her income in taxes as a CEO doesn't strike Germans as egalitarian, it strikes them as unjust. What's more, the trade-off of taxing consumption rather than income seems counterproductive in a nation where the lack of domestic demand is a continual problem. Germans need more incentives to consume, not fewer.

The other problem is the source. In the United States, the involvement of professional economists, Wall Street executives, and CEOs in political campaigns and the formulation of economic and tax policies is not only accepted, it's preferred by both parties. Not so in Germany. Although Germany has more than its share of world-beating, world-class companies—Siemens, DaimlerChrysler, SAP, and BMW, to name a few—its CEOs possess little juice. At a moment where there is a wide perception that the political system can't adequately address Germany's economic problems, there is still no room in Germany's political life for a Ross Perot, a Robert Rubin, a Paul O'Neill, or a Larry Lindsey. No wonder German executives are perpetually gloomy.

In the United States, anti-intellectualism generally flows from right to left, with conservative populists ridiculing liberal pointy-heads. In Germany this fall, it's flowing in the opposite direction. Schröder has dubbed Kirchhof the "professor from Heidelberg." Even Merkel's own CDU has hardly embraced Kirchhof's proposal. Its platform calls for a more modest move on taxes, bringing the top rate down from 42 to 39. The candidate herself is now sprinting away from her adviser's proposal. "Our program says nothing about a flat tax," she said yesterday. Now that's exactly how an American politician would behave: floating the idea of a flat tax, then running away when voters actually realize what it would mean.