Kohl's big tax bonanza falls flat yes

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The Independent Online
Fifteen years after coming to power on a tax-cutting ticket, Chancellor Helmut Kohl finally saw off his "Great Reform Bill" yesterday, though his life's work was denounced as a messy compromise with little benefit to anyone.

In the twilight zone of government finances, rendered opaque by tricks to conjure up a healthier-than-life budget, experts could agree on only one thing: the modest tax hand-outs would make it impossible for Germany to meet the Maastricht criteria in coming years.

The package, passed in its final reading yesterday by the Bundestag, promises to cut the "solidarity tax" earmarked for east Germany next year and reduce income tax and corporation tax by DM30bn in 1999. Thus will Mr Kohl go to the voters next year, trumpeting a give-away that should bring the basic rate of income tax down to 15 per cent from the current 22.9 per cent and reduce the top rate by 14 points to 39 per cent.

The gains are already less, however, than the government intended, and fail to take account of money the state will take away with the other hand. The immediate problem Germany faces is that its budget is heading way beyond the Maastricht limits this year, is set to balloon next year and will be in the stratosphere in 1999, the annus mirabilis, or otherwise, of monetary union.

The original plans, articulated yesterday by the Finance Minister, Theo Waigel, as "making Germany fit for the 21st century", have had to be watered down. Incentives for business to keep jobs at home have been largely scrapped, while corporation tax burdens that would have gone in tandem with the breaks in 1999 are to be brought in next year, to fill Mr Waigel's holes.

"A scandal," was how Hans-Olaf Henkel, head of the Confederation of German Industry, described the package. Business leaders were outraged by plans to slash the limit on tax write-offs allowed against losses.

But the government was forced to delve into the pockets of its friends because it found itself short of billions of Deutschmark. This year it needs to pluck out of thin air DM18bn (pounds 6.6bn ) to get within shot of the budget deficit figures prescribed by Maastricht. Next year, Mr Kohl's new finance minister, for few expect Mr Waigel to keep his job, must find an extra DM35bn.

Much of this will come from selling the family silver. Mr Waigel is proposing an under-the-counter sale of shares in the telephone monopoly, Deutsche Telekom, netting DM25bn, and a clear-out of state-owned property. Technically, such proceeds cannot be counted towards qualification for Emu, but Germany hopes its partners will be less pedantic in this case than it has been with them.

The opposition Social Democrats are taking the government to court for failing to produce an honest budget, and yesterday said they would block the "Great Tax Reform" in the upper house, the Bundesrat.

Mr Kohl's re-election ticket will then be referred to endless committees and be trimmed further, beyond recognition, which leaves him with not much to crow about in next year's general election.