Germany considers giving states more autonomy on taxes
(Reuters) – The German government is considering a proposal to give the country’s 16 states more freedom to set their own tax rates, even though many of the states oppose the plan.
In a interim paper obtained by Reuters, the government said it was open to talks on giving the states more autonomy on taxes. Some rich states favour the idea; poor states are firmly opposed, believing it would lead to destructive competition.
“The federal government is, in principle, open to having a discussion on this topic,” said the report, which came from a committee of state and federal officials working on proposals for the German tax system from 2019. The committee is also examining the solidarity tax on income, which expires in 2019.
Such a proposal was unlikely to become law in Germany, said Christian Odendahl, chief economist for the Centre of European Reform. The country has a record of solidarity among states, with richer states spreading the wealth across the nation.
“I see very little prospect of tax competition in Germany, the reason being that the states would have to agree to that (in the upper house of parliament,” he said. In a best-case scenario, there might only be four of the 16 states in favour: Bavaria, Baden-Wuerttemberg, Hesse and Saxony.
Odendahl said, nevertheless, it was an interesting development.
“In general, reforming the way in which the different tiers of government are financed is certainly a good idea, and a job for a grand coalition. But I don’t see strong tax competition as the outcome of this.”
Introducing competition between states in Germany would be a significant step, said Carsten Brzeski, a senior economist at ING. “So far, the system was clearly based on solidarity between the states, so it would be quite a change,” he said.
“The upside is that maybe this provides incentive for more structural reforms in the less-developed states. But at the same time it seems that the system of solidarity is at least partly given up and it would remain to be seen whether this is healthy for Germany or not.”
It would, however, help the rich get richer.
“The states that are doing well right now have a huge advantage at the start,” Brzeski said. “They are economically strong, they could afford lower taxes to create more incentives to maintain their wealth … for the less-developed states, it’s going to be harder.” (Reporting by Michelle Martin and Erik Kirschbaum; Editing by Larry King)
