German Finance Minister Wolfgang Schaeuble warned coalition colleagues that the government could not afford to lower taxes, telling a German newspaper that cuts of up to 10 billion euros were unrealistic. "I'm somewhat unhappy about the public debate, which creates the impression we have a lot of leeway for tax cuts - we don't," Schaeuble said in an interview with Sunday paper Bild am Sonntag.
"I would recommend everyone not to conduct debates that raise expectations and only lead in the end to big disappointment." Philipp Roesler, the new 38-year-old Economy Minister and vice-chancellor, has reignited efforts to cut income taxes, a key platform for his junior coalition partner Free Democrats (FDP), who are floundering in the polls.
Even if Chancellor Angela Merkel's government were to propose tax cuts, though, it would almost certainly require the support of the upper house of parliament, which is controlled by the opposition. Speaking to a Sunday weekly paper, the head of the Social Democrats (SPD) vowed to block any tax cuts in the upper house, or Bundesrat, which represents the 16 federal states. "We certainly won't go along with it," Sigmar Gabriel told the Welt am Sonntag. "We don't do deficit-financed tax gifts."
Should Merkel plan to hike the maximum income tax rates for the wealthy in exchange, then the SPD would be willing to talk, he said. Schaeuble backed up his skepticism by saying the government was still "far off" from conforming with the constitutional debt brake amendment, which requires a budget deficit of 0.35 percent of economic output by 2016.
"We have huge tasks ahead. The change in energy (away from nuclear) will mean additional costs, and we need to start making provisions for the European Stability Mechanism (ESM) beginning in 2013," he explained to Bild am Sonntag. He did signal a certain willingness to discuss changes to Germany's tax brackets, which are not automatically increased in line with inflation as in many other countries.
As a result, taxpayers receiving a cost of living adjustment can for example end up with less in their pockets once adjusted for a rise in consumer prices. "This is an additional tax burden, whose justification is debatable. (...) We can certainly talk about how we can eliminate this mechanism," he said. The German taxpayers association (BdSt) calculates that the so-called "cold progression" in taxes disproportionately hurts lower income households and can easily constitute the bulk of additional taxes paid.