Hard Line Merkel to Small Business: No Tax Relief

At a convention next week, the German chancellor's CDU party will wrestle with demands from Germany's powerful "mittelstand'' layer of businesses for a special tax break.
Gloomy prospects for Chancellor Angela Merkel's plan to save cold progression.

A story about German Chancellor Angela Merkel is making the rounds in Berlin these days.

Ms. Merkel is rumored to have said that she never agrees to something unless she is convinced of its merit by the steering committee of her political party, the center-right Christian Democratic Union. The remark reportedly brought smiles to the faces of some of her colleagues. After all, her party has already lowered the retirement age to 63 in its coalition with Social Democrats, and next year will probably impose road tolls on automobiles, which Ms. Merkel has always opposed.

Next week, the German chancellor may again make another big compromise by agreeing to dismantle the so-called "cold progression'' in Germany's income tax system, the steep upward ratcheting of nominal personal income tax rates above 40 percent when annual income reaches just €50,000 ($62,000). If things don't go her way, the 1,001 delegates at the CDU national convention in Cologne on Tuesday will vote for the plan and force Ms. Merkel to implement it against her will.

The CDU has been trying for years to abolish the progression, which penalizes most of the middle class. The principle: If your income rises with inflation to preserve your standard of living, you should not have to pay more income tax. But aside from complaining, the CDU has never moved to abolish the rate structure, even when it controlled the Chancellor's office, because of the loss of government tax revenue that would result.

There are now 72 motions regarding cold progression to be presented at the party convention.

Ms. Merkel has argued that abolishing the "cold progression'' would be too costly.

Her party's credibility with voters is based on its ability to balance the federal budget, and a promise not to raise taxes,. she has argued. Both would be jeopardized if the cold progression were abolished.

Her finance minister, Wolfgang Schäuble, defends his boss: "For most citizens, it is ultimately merely a question of paying a few euros less a month," Mr. Schäuble said. The tax revenue from the cold progression has already been budgeted for government projects, he said.

Volker Bouffier, the governor of the western state of Hesse, has mobilized the CDU's steering committee to retain the cold progression, saying German states and municipalities would be decimiated by the loss of tax revenue.

But for CDU members who support Germany's small- and mid-sized companies and for those who advocate on behalf of individual taxpayers, there is more at stake than the fiscal health of the federal budget. For them, it's a question of fairness and equity. The topic is expected to dominate the convention next week, obscuring other issues.

The new head of the small and mid-sized business association, Bundestag member Carsten Linnemann, has been agitating to eliminate the cold progression for months. There are now 72 motions from local, district and national party associations, as well as other organizations, to be presented at next week's party convention. The motions accept that a balanced budget remains the top priority and there can be no tax increases.

But they motions also argue for the elimination of the cold progression, which detractors call a secret tax increase.

Mr. Linnemann, the business advocate, has support from prominent business leaders.

For Lutz Goebel, the head of the German Association of Family Owned Enterprises, the CDU would be breaking a central campaign pledge not to increase taxes if it votes to preserve the cold progression.

"Cold progression is nothing but a progressive, hidden tax increase," says Mr. Goebel said. He also doesn't want to let Ms. Merkel and Mr. Schäuble delay any reforms until after 2017, and is determined to end the "secret tax increase" in the current legislative period. "We need a binding date for the elimination of cold progression," said Mr. Goebel.

A party convention resolution without a fixed date, or a date after 2017, would be voter deception. Oliver Zander,, managing director of the metal industry's employers association

Hans Peter Wollseifer, the president of the German Confederation of Skilled Crafts, also sees himself as an ally. "Politicians have been promising to eliminate cold progression for years," he said, noting that it's time for them to deliver on their promise.

Oliver Zander, the managing director of the employers' association in the metal industry, also wants quick action.

"Of course the elimination of cold progression has to be approved in this legislative period, and it should come into effect by no later than January 1, 2017. A party convention resolution without a fixed date, or a date after 2017, would be voter deception," says Mr. Zander.

But the CDU party leadership and Ms. Merkel have been unwilling to name a date for when the government is prepared to do without revenue from the cold progression. It also rejects an automatism for the ensuing years, because this would cause the revenue source to dry up in the long term. In addition, the party compromise is currently worded in such a way that everything is subject to the approval of the Bundesrat, the upper chamber of the parliament that represents the German states.

The CDU’s executive board plans to pass a resolution on its motion for the convention on Monday. The goal is to achieve a compromise and thus avert a crucial vote, for which chances are 50-50 according to sources. Alternatively, there will be a lengthy debate and subsequent vote, which economic experts like Bundestag member Joachim Pfeiffer would welcome. "An open discussion certainly doesn’t hurt the party," says Mr. Pfeiffer. But a defeat by the Mittelstand group would send a bad message, especially as the CDU intends to portray itself as the party of the economy at its convention.


Daniel Delhaes reports on politics, transport and airlines from Handelsblatt's Berlin office. Thomas Sigmund is the bureau chief in Berlin, where he directs political coverage. To contact the authors: [email protected]; [email protected].