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The left-leaning Social Democrats’ takeover of the country’s powerful finance ministry for the first time in almost a decade is essentially the biggest tax overhaul in the newly formed coalition agreement with the Christian Democrats, economists and tax attorneys told Bloomberg Tax.
And while some see a Social Democrat-led finance ministry as a positive catalyst for unifying European tax treatments, others believe the move will usher in an era of heftier financial regulation and circumvention of budgetary control measures that could impact German global competitiveness.
“I think it’s always good to have some change at the ministry level because otherwise we have too much policy controlled by those belonging to one party,” Oliver von Schweinitz, a partner with GGV law firm in Hamburg, told Bloomberg Tax in a Feb. 12 telephone interview. “But we’re still in a sensitive moment of European history and we’re seeing persons coming to power who aren’t in favor of a market economy.”
The agreement envisions a harder push toward tax harmonization within the European Union, the gradual dismantling of decades-old tax treatments and heightened investments in digital infrastructure and social programs.
However, it’s the coalition’s plan to give the Social Democrats control over the ministry—not only to steer domestic tax treatments but also to navigate the nitty gritty of foreign fiscal policy issues such as Brexit—that many are saying is the most significant change.
Though agreed to by both parties Feb. 7, the arrangement must be put to a vote by the Social Democrats’ over 460,000 party members before it’s finalized, a process which could take until the beginning of March to complete.
Most of the tax measures outlined in the agreement appear politically neutral, with noticeable strokes of the Social Democrats’ ideology painted throughout, such as the partial abolition of the nation’s 5.5 percent solidarity surcharge to benefit low and middle-earners to the tune of 10 billion euros ($12.26 billion) by 2021, and billions more in investments into infrastructure, social housing and childcare, economists and attorneys told Bloomberg Tax.
Even so, with the Social Democrats poised to control the finance ministry, tax attorneys expect a push for increased regulatory and transparency measures not mentioned in the agreement.
Attorneys told Bloomberg Tax that some in the Social Democrats’ camp are already advocating for the nation’s Financial Supervisory Authority (BaFin) to assume oversight and registration of some 40,000 financial asset managers who were previously registered with the federal states’ respective chambers of commerce, a move outside of the agency’s traditional purview.
They also anticipate more stringent domestic reporting duties on corporate tax structures that would possibly run up against professional secrecy rules—industry rules that were already loosened with the passage of a law in June (Steuerumgehungsbekämpfungsgesetz) that effectively ended banking secrecy in Germany, attorneys say.
Such domestic regulatory measures could be troublesome as countries such as the U.S. and the U.K. take steps to lower their corporate tax rates to attract business, instead of implementing new regulatory hurdles.
“Their belief of a level playing field is always leveling the playing field through heavy regulations,” Von Schweinitz said of the Social Democrats.
Economists and German politicians from myriad parties—both those inside and outside of the prospective coalition government—told Bloomberg Tax that the agreement’s full-throated call for European tax integration could be more readily accomplished now that the Social Democrats would be taking over the influential finance ministry.
“It also should give the SPD more influence on European policy during the next term of government,” Carsten Brzeski, chief economist with ING-DiBa in Frankfurt, told Bloomberg Tax in a Feb. 7 telephone interview.
“It should also mean a subtle change when it comes to austerity,” he added. “I think they will lose this moral finger-pointing that we often had under [former Minister of Finance] Wolfgang Schäuble, which would also help in improving the relationship with southern European countries.”
Members of the lower house of the German Parliament, the Bundestag, largely echoed the sentiment that it was due time for Germany to surrender its role as the firm financial hand of Europe, a practice propagated by former Minister of Finance and Christian Democrat Wolfgang Schäuble, who held the position for the past nine years.
“After years of a resounding ’no’ from Schäuble, the Social Democrats are opening the door to constructive talks with our French partners. That’s what Europe needs,” Gerhard Schick, the parliamentary spokesperson for financial policy for the Green Party in the Bundestag, told Bloomberg Tax in a Feb. 7 email.
Ending unilaterally dictated austerity measures out of Berlin goes hand in hand with the pro-European financial policies outlined in the agreement—such as pushing for a common European financial transaction tax and determining a European value-added tax (VAT)—the Social Democrats’ parliamentary spokesperson for tax and financial policy, Lothar Binding, told Bloomberg Tax in a Feb. 7 telephone interview.
“Austerity is like starving someone, and that always ends in disaster,” said Binding. “It’s an idea when one is looking to educate someone. But states cannot be educated.”
The Christian Democrats’ parliamentary spokesperson for tax and financial policy, Antje Tillmann, told Bloomberg Tax in a Feb. 12 email that “in the case of European action, I assume that any future minister of finance will involve all coalition partners before actions are taken,” adding that no finance minister can act unilaterally, regardless of party affiliation.
While Von Schweinitz agrees that Germany shouldn’t act as a “fiscal headmaster” within the bloc, he’s wary of calls for fiscal unity within the Eurozone without first laying the groundwork for such a transition, such as a shift away from sovereign budgets.
“As long as we do not have such joint policy, it doesn’t make sense,” he said, adding that it’s a dangerous time in Europe for politicians to advocate for fiscal solidarity measures within the bloc with some member states still on shaky ground, economically speaking.
“Here in Europe, we’re entering a gray zone where we don’t really know what’s the effect of Spain going bust, for example. We don’t know. And I think that lends to moral hazard by politicians wherever they are,” he said.
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