The Corner

Digging a Deeper Hole

Over at the London Times, Anatole Kaletsky weighs in on the decision of the incoming German ‘grand coalition’ to increase taxes. Now, Kaletsky can be too alarmist at times, and I certainly wouldn’t agree that Bill Clinton’s tax increases stimulated economic growth (discussion for another time, but really…), but this is dead on:

“The new German Government is launching one of the boldest experiments ever undertaken in the history of economics — or rather anti-economics. Germany in the past three years has been the world’s most depressed economy, with the weakest growth in economic activity and consumption. The coalition partners — representing, as they do, the opposite ends of the political spectrum — found it hard to find common ground on most issues, but on one point they could emphatically and enthusiastically agree: the way to stimulate an economy suffering from mass unemployment and stagnant consumption is to increase tax…the new German Government has decided to impose one of the biggest tax increases in postwar history and to target the extra taxes on the weakest and most sensitive parts of the economy: consumption, which will suffer a three percentage point increase in VAT, and housing, which will lose tax incentives for first-time buyers. In addition, to fend off accusations that the new consumption taxes will bear unfairly on poorer consumers, the Government will hit the rich as well, increasing the top rate of income tax from 42 per cent to 45 per cent. It seems that Angela Merkel’s idea of a compromise between the Christian Democrats, whose most unpopular idea was the VAT increase, and the Social Democrats, who were berated for demanding higher income tax, was to combine the most unpopular measures from both parties’ manifestos, while dropping all the rest.”

Making it worse, the European Central Bank is probably looking to boost interest rates, the last thing that Germany needs, but what it will get for signing up for a single currency that makes no sense at all.

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