Flat tax in Germany?

The overall result of the upcoming German election is, of course, unknown. The CDU/CSU is likely to garner more votes than the SPD, but its past coalition ally, the FDP seems to be struggling, and may slip behind not only the greens but also the alliance of former communists and social democrat dissidents. In the last election the Christian democrats and social democrats virtually tied, but the Green Party's small lead over the FDP put the SPD/Green coalition back into power.

If, as still seems most likely, the CDU/CSU forms a majority coalition with the FDP, then there is a real chance that government could adopt a flat tax. It seems as though the CDU leader, Angela Merkel is leaning that way, and has appointed a leading proponent of the idea as her top advisor. It is not CDU/CSU policy, but the government policy will be decided by negotiation between the coalition allies, and the FDP, being more free market oriented, might press for the flat tax in the negotiations.

The implications of this are stunning. Germany has one of the most onerous and complex tax regimes in the world. The reform economies in central and eastern Europe, including some in the EU, have been attracting investment partly on the basis of low, flat, taxes. If Germany, already recovering from long term stagnation, were to adopt such a policy it would probably boost the country's growth almost immediately. This would have a direct effect on the economy across Europe - despite slipping in GDP per head, Germany remains in absolute terms the largest economy in Europe. More significantly, it would set a powerful example. Other countries would probably follow suit.

Italy might be the first - the country certainly needs a simple and dramatic solution to its problems as other attempts to reform the economy continue to flounder. France seems an unlikely convert to the flat tax, but if Nicolas Sarkozy becomes President it would become a real possibility. He is one of the few French politicians who genuinely seems to recognise that the European "social model" has failed. Britain, though at the free-market end of the European spectrum, would need a change of government first. Gordon Brown, Tony Blair's Chancellor of the Exchequer and likely successor, recently published some "research" on the flat tax with all the favourable aspects of the findings censored.

The big convert could be the US. The debate on the flat tax is lively in the US, but the prospect of another major economy taking that route could tip the debate decisively in favour of reform.

Angela Merkel is said to see herself as Germany's Margaret Thatcher. The flat tax could prove as successful an export over the next ten years as privatisation was in the 1980s and 90s. If she really wants to be Margaret Thatcher, this is the route to take.

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