Tax Analysts Blog

Prospects for Corporate Tax Hikes in U.S. and Germany

Posted on Sep 21, 2009
After the September 27 election Angela Merkel is likely to retain her hold on leadership of the German government. The burning question is whether the Chancellor's conservative CDU party will continue the "grand coalition" with its main rival, the center-left SPD. The other likely possibility is a shift in the other direction and the formation of a coalition with the right-wing FDP. Due to uncertainty about election results and post-election interparty negotiations, the outcome is unpredictable.

The implications for tax policy are large. If the CDU-SPD coalition continues, German businesses -- like their counterparts in the United States -- are likely to face tax hikes from a government that gives priority to deficit reduction. But if Merkel ends up allied with the FDP, not only is it possible for business tax hikes to be avoided but business tax cuts may even be possible.

Today's Financial Times reports business leaders cheering the prospect of an FDP in power ("Industry Buoyed as Tax Cuts Rise Up the Political Agenda"). A coalition including the free-market, pro-business party is good news for industry leaders who want "an attractive tax system."

Also from the Financial Times, an excellent column by Wolfgang Munchau explains why Sunday's election could be a turning point even if Merkel remains in power:
    A centre-right government would probably cut income taxes, probably not cut spending to the same extent, and thus tolerate a higher deficit in the short term. Germany’s newly agreed constitutional balanced budget rule will start to kick in only after the next parliamentary term, so this is probably the last chance for a big across-the-board income tax cut, for which the FDP has been campaigning. . . . A grand coalition, by contrast, would shift to the left on industrial, social and tax policies. . . . The only policy area where a grand coalition would be more conservative is fiscal policy. It would try to be among the first European governments to exit the crisis, probably unilaterally. The budget consolidation would not come through growth, but through savings and higher taxes.

Meanwhile back in the USA, with a sky high national debt and no prospect of a conservative return to power for at least three years, business leaders are bracing for an onslaught of tax hikes. They are especially vulnerable given the rise in anti-business sentiment and President Obama's pledge not to increase taxes on families with income below $250,000. The Obama budget proposed hundreds of billion of dollars in business tax increases. And the tax commission headed by Paul Volcker is likely to propose more when it reports to the President in early December.

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