Moritz Schularick, the economist and president of the Kiel Institute for the World Economy, has proposed a significant increase in the value-added tax (VAT) as a mechanism to fund reductions in social contributions and provide tax relief elsewhere.
Schularick told the economic magazine “Capital” that achieving a genuine tax reform and alleviating burdens on income and profits necessitates an adjustment to the VAT. He suggested that raising the VAT, for example, by three percentage points, could generate sufficient extra revenue to substantially lower the combined burden of taxes and social contributions. This, he added, would also make labor more affordable for companies in Germany.
In reality, both coalition partners, the CDU/CSU (Union) and the SPD, had previously reviewed the option of increasing the VAT this spring to finance greater tax relief or cuts to social payments. However, due to the sharp rise in inflation, which has been exacerbated by the war in Iran, and out of concern over potential large-scale protests, they apparently abandoned this reform option. Subsequent coalition negotiations regarding tax relief ultimately led only to a smaller-scale reform-which has been subject to considerable criticism since its implementation-due to a lack of budgetary room.
Schularick shared this widespread criticism, stating that he had hoped the government would have demonstrated more resolve. He argues that the aim of such a reform must be to grant companies and consumers greater latitude in their own spending and investment decisions. It is only through this means that a foreseeable economic upswing for Germany can transform into genuine and durable domestic prosperity.
