A Solidaritatszuschlag tax is fair and effective. Needs revisited?

“No to Cuts…Solidaritatszuschlag is the Answer!”  This was the title of an SoR blog posted on 10th October last year. I think it’s timely to post it again – see below.

A lot has happened in a year. Cuts and tax increases have been the order of the day. It’s been hair shirts for all (for most anyway). There is no doubting the need to get the deficit down – and as soon as possible, but there’s been a total lack of imagination when it comes to finding ways of achieving the necessary savings without destroying everything in the process. There have been no ‘big ideas’ about how to maintain growth, no initiatives to stop consumer confidence going down the pan. It’s been slash and burn all the way .

Twelve months on and the effect of this crude cutting spree and a paucity of ‘big ideas’, is coming home to roost. Growth has all but disappeared, confidence has dropped to its lowest level for decades, unemployment is on the rise, and now the Euro crisis is on the verge of pushing us over the precipice.

Is it too late for something new? Maybe not. Perhaps it’s time to consider a solidaritatszuschlag tax. It can be as effective in terms of revenue generation as an increase in VAT, it’s fairer and it wouldn’t have such a depressing effect on consumer confidence. Is it worth considering swapping a reduction in VAT or a growth promoting increase in government spending with a solidaritatszuschlag tax? Worth a thought. Isn’t it an ideal tax for the likes of Greece and Italy for the same reasons?

 

No to Cuts…Solidaritatszuschlag is the Answer!

 

In 1991 the German government was faced with a massive bill for the reunification of Germany. The figures were astronomic. Our deficit figures are pathetically small in comparison – anywhere between £109 billion to £175 billion depending on who you believe.  Reunification has so far cost Germans £1.3 trillion+.

To pay for reunification, the German government introduced a ‘Solidarity Tax’ (Solidaritatszuschlag). This tax is based on the amount of tax that you pay. The initial level was set at 7.5%, so if your tax bill is €10,000 you would pay €750. As far as taxes go, this is as fair as they get. The wealthier you are, the more tax you pay (or should pay!) and therefore the greater your contribution. The tax also applied to corporate taxes and capital gains.

The point to note here is that the Germans didn’t go on a mad cutting spree, and rip the heart of their economy. They didn’t condemn hundreds of thousands to the dole queue. They introduced a fair tax to raise the revenue needed to deal with a specific problem. The German economy was allowed to grow, unmolested by the whims of politicians. German workers were spared the hardship of unemployment. An intelligent solution was found to a pressing problem.

Solidaritatszuschlag raised nearly £13billion a year. I believe the figure would be very similar if a solidarity tax were to be introduced here. The planned VAT increase in January is estimated to bring in approximately £12 billion a year. Over a four year period both taxes would bring in a revenue of £76 billion, which would go a very long way to eliminating the so called structural deficit and forgo the need for swingeing cuts.

Today, PWC forecasters have estimated that the cuts that are being proposed are going to increase unemployment by more than a million. Apart from being totally unacceptable, this is going to result in an additional £20 billion in welfare costs over a four year period and add to the problem.

Isn’t it time for bit of joined up thinking? The level of cuts that are being proposed are going to ruin Britain and bring untold misery to millions. We are allowing ourselves to be herded towards a precipice all because of a mad fixation on ‘cuts’, a lack of imagination and common sense. There are many ways of skinning a cat. A Solidaritatszuschlag tax is one of them.

 

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