Wednesday, June 28, 2006

Welfarism 5: Germany's Tax Hikes

Three weeks ago, May 12, I wrote this:

The government of Chancellor Angela Merkel found a solution to address Germany's financial needs to retain its expensive welfarism programs while avoiding budget deficit of 3 percent of GDP or higher -- by raising VAT from 16 percent to 19 percent. Taxpayers in the private sector naturally, raised howl as their money will buy less since the government will siphon off nearly 1/5 of the retail prices of the goods and services that they will consume. They protest, and rightly so, that their government has deemed it more important to raise already high taxes, than cut expenditures and pursue painful but necessary reforms in social security and the labor market.

The projected increase in government revenue from such 3 percentage point increase in VAT would be E8.1B ($10B) this year.

In addition, the government will also scrap selected tax rebates for individuals and introduce a 3 percentage-point top-up tax for high earners. In effect, this package of "tax reforms" is a double whammy of hikes in both income tax and consumption tax! Boy, if you're a politician and a high level government bureaucrat, what more can you ask? You got most of the money you want, forcibly taken away from the pockets of citizens, and spend that money on whatever programs you have in mind. From retaining if not expanding the already expensive welfare programs, to paying off large debts (principal + interest) accummulated through the years again, to finance the elaborate domestic welfarism and external military and foreign aid expenditures.

* But on the EU front, Ms. Merkel proposed slashing EU legislation by 25 percent in an effort to shrink the EU bureaucracy and encourage entrepreneurship (www.ft.com, May 11, 2006, "Germany proposes cutting EU laws by 25%", by Bertrand Benoit).
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Ms. Merkel ran on promises of more competition, smaller bureaucracy and tax cuts. Eight months into the office and she has already hiked VAT from 16 to 19 percent, effective January next year. In the works is another tax hike, possibly in income tax.

Why the double-whammy of tax hikes? You bet it, to finance welfare hikes. The new plan is to spur birth rate, to arrest the "greying" of the population, and encourage working women to have a family then return to work. This will necessitate expanding the already expensive and bureaucratic health care system, to cover children that would cost from €16 to €25 billion, or $20 to $31 billion.

Currently, around 90 percent of German adults are insured through 250 health care insurance companies, a system that eats up money with little accountability. Patients in the public system do not receive bills. Instead, the doctor is reimbursed through the patient's public insurance company. Conversely, in the private health insurance system, patients receive a bill that meticulously records the cost of each treatment.

Again this is another kind of "social engineering" by the politicians and the dominant political parties. They did some social engineering in the past, something that discouraged people from having bigger families, or from having a family in the first place. So, this new round of social engineering is to reverse that, to encourage people to have more babies, so that those children will work someday to finance the unfunded social security and health care currently enjoyed by their grandparents, and in a few years to be enjoyed by their parents.

If falling birth rate, and expensive, bureaucratic public health care are the problems, then I think new round of tax hikes and more welfare are not the answers. Instead, the government should (a) loosen the welfare system and cut taxes, allow individuals and households to assume greater responsibility for their families, from education to housing and health care. And government should (b) relax entry of migrants from other countries when demand for them by households and the citizens increased. How would these twin moves help encourage bigger families?

When parents have bigger disposable income and immigration is relaxed, they will hire nannies and domestic workers from abroad who will help them take care of their kids and the house while the couple is working and partying sometimes.

I have a German friend, a lawyer, who married a beautiful Filipina, also a friend, and they live south of Munich. They have a handsome son with a good Euro-Asian features (white skin, black eyes, and so on). Their son is a bit sickly sometimes, and the wife can possibly work if she wants to. So I asked my German friend why they will not hire a Filipina nanny to help them with the kids and household work. After all, the wife can find someone in the Philippines whom they can trust very well, and the pay is not expensive. My German friend said, "No Nonoy, it's very expensive to hire a nanny here. I can pay for her monthly pay, but I will also have to pay for her health insurance, social security insurance, unemployment insurance, and many other government-required insurance and welfare programs." Well, not to mention the difficulty of getting a work visa in Germany.

Germany's welfare vs. tax woes is a good case to watch for those in many poor countries. Many of our politicians, NGO and labor leaders, academics and media people, some businessmen, and foreign aid staff and consultants, "envy" the extensive welfare system of Germany and many European countries. They want to replicate many of those system in their respective poor countries, to "fight poverty". And so they are all one in justifying high and multiple taxes, especially in "taxing the rich", so the poor can be given generous welfare, from free education (elementary to university) to free hospitalization, and so on.

I say to them: don't arrogate personal responsibilities to the "collective"; don't assign parental responsibilities to government responsibilities; and don't confiscate parents' incomes for government and politicians' funding.

Related story, see http://www.iht.com/articles/2006/06/27/news/germany.php

* See also:
Welfarism 1: Dependence vs. Individual Responsibility, October 17, 2005
Welfarism 2: France Riots, Taxes in Welfare States, November 17, 2005
Welfarism 3: Spiraling Costs and Rent-Seeking, April 21, 2006
Welfarism 4: Italy's Fiscal Woes, Kid Glove to Criminals, May 29, 2006

1 comment:

Krishna Neupane said...

Execellent piece to read. your second argument about influx of immigrants is pretty strong to fill the population gap in developed world.

Krishna