The coalition partners — representing, as they do, the opposite ends of the political spectrum — found it hard to find common ground on most issues, but on one point they could emphatically and enthusiastically agree: the way to stimulate an economy suffering from mass unemployment and stagnant consumption is to increase tax.
Germany’s plan to cure its self-confessed economic failure by doing exactly the opposite to what modern economics would suggest is certainly a bold and novel idea. Jim O’Neill, the chief international economist of Goldman Sachs, remarked on television last week that German politicians are acting as if they had never seen an economics textbook, much less understood one.
Accordingly, the new German Government has decided to impose one of the biggest tax increases in postwar history and to target the extra taxes on the weakest and most sensitive parts of the economy: consumption, which will suffer a three percentage point increase in VAT, and housing, which will lose tax incentives for first-time buyers. In addition, to fend off accusations that the new consumption taxes will bear unfairly on poorer consumers, the Government will hit the rich as well, increasing the top rate of income tax from 42 per cent to 45 per cent.
So the stimulus plan for a shaky economy is to HIKE a regressive tax (VAT), lift the marginal tax rate for wealthy individuals AND DEPRESS the property market?? They seem to have gone stark-raving mad in Berlin. Kaletsky notes that fiscal policy like this would need to be accompanied by loose monetary policy and a devalued currency. Except the ECB controls both and is looking to raise rates. Seems like a good prescription for a deflationary spiral. Folks are thinking the euro may be near a short term bottom here at 1.17 but if the Germans go through with this insanity (changes to take effect in January 2007) I don't want to be long any euro.
HT: The Corner