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Cheers from Tokyo!

Have a great summer!

On a different note:the German government coalition has decided on moderate income tax cuts, at least in principle. The main focus will be on making the tariff a bit more linear around the “middle class belly” in order to avoid “cold progression” (which is the metaphor for over-proportionate tax increases caused by inflation).

Since we do not (yet) enjoy a budget surplus in Germany (Sweden is the role model), there is of course a debate on whether debt-financed tax cuts (“deficit-spending”) are advisable at all. I look at it this way: Keynesian deficit-spending has had its renaissance in the crisis years and is now once again regarded as a pragmatic instrument, provided it is not overdone. Recent research suggests, however, that the multiplier of “stimulating” state expenditure has been below 1 (Tobias Cwik/Volker Wieland: Keynesian Government Spending Multipliers and Spillovers in the Euro Area, EZB Working Paper Series Nr 1267, November 2010). So if a certain degree of deficit-spending is still ok in principle to further strengthen growth an employment, moderate tax cuts could even be superior to additional state expenditure, especially since they would favor domestic demand over booming exports. But even if this view is not shared and deficit-reduction targets, as required by Germany’s constitutional “debt-brake”, take center stage, it could still be argued that moderate tax cuts can partly finance themselves since an economy is not a zero-sum-game. The partial self-financing depends, of course, on whether people believe that the debt-financed tax cuts are sustainable and in this sense credible. In this context, it could be argued that the more tax cuts are percieved to be infringing on the fixed deficit-reduction targets the less credible they are. This brings me to the conclusion that it might still be worthwhile to look at the current temporary 5,5% point levy on income tax. Its temporary nature means that, in the longer run, it is not available anyhow to support a balanced budget as per constitutional requirements, hence a possible advanced phase-out might have a good chance of not being percieved as infringing on the deficit-reduction targets.

On a totally different note, I confess being fascinated by Professor Paul Kirchhof from the University of Heidelberg who, after almost a decade of hard work, has just presented his “opus magnum”, a proposal on making the German tax system more just, more simple and more transparent. He proposes to do away with 33 000 different norms, including any number of exceptions and loopholes, and go back to 146 paragrafs and three main taxes:

• income (25% flat on personal as well as corporate income; 0% on basic income),
• value added (19% as is; with simplifications in the sales tax direction) and
• inheritance (10% flat with possibility to defer).

According to Paul Kirchhof the revenue from this transparent system should be at least the same as now (the catchword is revenue neutrality); in the initial phase a “safety margin” of 3 percentage points could be added to the income tax rate. The effects on income distribution is expected to be positive, i.e. favoring smaller and medium incomes. The local corporate tax (Gewerbesteuer) would be replaced by a variable local levy on the income tax.