Merkel seeks to shore up support with tax-cut offer

Oct 20, 2011, 14:46 GMT

Berlin - German Finance Minister Wolfgang Schaeuble gave his blessing Thursday in Berlin to proposals to reduce income taxes, amid political haggling over the terms for future eurozone bailouts.

Schaeuble, who has spent weeks coaxing reluctant Germans to back a beefed-up European Financial Stability Facility (EFSF), said an accord was forming between the three parties in Chancellor Angela Merkel's coalition to adjust tax scales from 2013.

But within minutes, one of those parties, the Bavaria-only Christian Social Union (CSU), denied there was any deal yet.

Political bargaining in Berlin is in high gear in advance of a European summit about bailouts on Sunday.

Schaueble, one of the most powerful figures in Merkel's Christian Democratic Union (CDU), gave no immediate details of the cut, but conceded it would not make a dramatic difference to individuals.

The offer was a political bonus for another junior party, the Free Democrats (FDP).

The pro-business FDP has continually pushed for lower taxes for the middle classes and is currently suffering an all-time low in opinion polls.

Cem Ozdemir, co-leader of the opposition Green party, dismissed the tax announcement as a 'manoeuvre' to distract attention from the euro crisis and a 'sedative' for restive legislators in the coalition.

Merkel's government is eager to win approval in the Berlin parliament for guidelines to be finalized this week on EFSF operations.

The final draft refers to the EFSF gaining limited financial 'leverage' by buying government bonds, but not to the more controversial issue of building leverage by guaranteeing commercial bond issues.

Schaeuble has been seeking to soothe the FDP, which has criticized the financial liability piling up on Germany, the eurozone's biggest economy, during efforts to underpin Greece and other over-indebted governments.

Schaeuble said adjusting income tax scales would reduce the revenues of the federal government, the states and local authorities by 6 billion to 7 billion euros (10 billion dollars) annually.

Germany's income tax system is progressive, with no tax at all on low incomes and a marginal rate of 45 per cent on the highest income.

Schaeuble said it had been an 'unintended' effect of the existing tax system that rates of income tax automatically rose whenever people received pay rises to catch up with inflation and shifted up tax brackets.

'We want to permanently eliminate this covert mechanism,' he said.

But Schaeuble said Germany would not be adopting tax indexation, a method that automatically reduces taxes in step with inflation.

'If you do that there's nothing to hold on to anymore,' he said.

'We will make discretionary decisions over time to fight it,' he said. Reviews would take place every two years, he predicted.

The tax offer was announced a day before Merkel was to meet with FDP leader and Economy Minister Philipp Roesler and Horst Seehofer, Bavaria's premier and leader of the CSU, to settle political differences.

Seehofer denied his party had approved the tax pledge.

'There hasn't been any deal with us,' he said in Munich.