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Tax-Cut Time for Germany?

The country's tax burden has been increasing for years, and economic growth is slowing. Tax cuts would help to keep investment and jobs in Germany, and would force its politicians to reexamine existing government expenditure rather than automatically increasing it.

MUNICH – A weakening economy has rekindled an old debate: does Germany need tangible tax relief for its workforce and enterprises in order to remain internationally competitive? Or should taxes go up to provide more funds for social programs and public investment?

Higher taxes create more room for government expenditure, while lower taxes limit the state’s spending capacity. The choice between these options is a political matter. But one general approach that might garner cross-party support in Germany would be to ensure that the share of economic output claimed by the public sector neither increases nor decreases over the medium term.

In fact, the ratio of taxes and social-security contributions to GDP in Germany has been increasing for years. A reference point for deciding the overall tax burden could be the year 2014, in which net new debt for the federal budget fell to zero. At that time, tax revenue (including contributions) amounted to 38.6% of GDP. By 2018, the ratio had risen to 39.8%.

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