Kohl fends off storm over tax cut fiasco

The German government's great tax give-away, which was intended to revive the economy and help re-elect Chancellor Helmut Kohl next year, has whipped up a storm within the coalition and provoked calls for the resignation of the Finance Minister.

The proposed leaner tax system for a fitter Germany is due to be unveiled today, but has already been condemned for its lack of vision. It is a blueprint of which Britain's Conservative government would be proud: headline income-tax rates are to be reduced but the real level of taxation will barely change.

The best visual illustration of the new system appeared in the conservative Frankfurter Allgemeine Zeitung, which yesterday carried a cartoon showing a piggy-bank with two slots. One is for rebates trickling in, whilst the second is for money pouring back to the state in the form of new taxes.

The good news is that, if Mr Kohl is re-elected, the top rate of income tax will fall in 1999 from 53 per cent to 39 per cent. At the other end of the scale, the bottom rate falls to 15 per cent from 26 per cent today. Germans earning less than 13,000 marks (pounds 5,000) a year will pay no income tax at all.

Corporation tax will be slashed next year from 47 per cent to 35 per cent, bringing cheer to companies currently saddled with the highest wage bill and some of the highest deductions in Europe. The German tax jungle, in which exemptions outnumber the rules, will be pruned back, though not as savagely as originally anticipated.

The bad news is that despite abolishing a myriad breaks, slapping tax for the first time on certain overtime earnings and raising more revenue from pensions, the Finance Minister, Theo Waigel, is DM25bn short of balancing the books. In the tooth of opposition from his ideological soul-mates, Mr Waigel is planning to plug the gap with a 1-per-cent hike in VAT, bringing it to 16 per cent.

That proposal has predictably raised opposition heckles, and accusations that the government is promising "tax cuts on one side and taking money out of people's pockets on the other". But such criticism from the Social Democrats was mild by comparison to the hysteria emanating from Mr Kohl's Christian Democrat party.

"If we don't go on to the offensive with a drastic tax cut as we promised, then a cabinet reshuffle would be desirable," argued Christian Wulff, a provincial leader of Mr Kohl's party. Mr Wulff was only one of a group, dubbed the "wild bunch", demanding Mr Waigel's head and implicitly accusing the Chancellor himself of broken promises.

Mr Kohl has sprung to his Finance Minister's defence, but has failed to silence a rare rebellion in the party. The row augurs ill for a re-election campaign that was to be fought on the tax record of his 14-year reign. The Chancellor may be forced to send Mr Waigel back to the drawing board today.

Even if the VAT rise can be averted, Mr Kohl's progress towards next year's elections will no longer appear a triumphant march. The consensus view is that social justice has suffered, without a commensurate benefit to business. And the welfare costs borne equally by employers and employees will remain on a steeply rising curve, ensuring that German labour will remain the most expensive in the industrial world.