France and German tax systems, EU cooperation

After visiting German finance minister Wolfgang Schäuble, French budget minister Francois Baroin comes up with some weird comments on Franco-German tax cooperation and the EU budget according to the EUobserver. Firstly, he recognises a broad consensus for deficit reduction in Germany. Apparently the impression most people have of France is that they like to run excessive budget deficits and do not have their budget in order. What is interesting here is that this picture of stark contrast is not really met in reality. France – just like Germany – has the highest credit ratings (i.e. paying the lowest rates on its debt because people see long-term value and not a debt swamp). Its business cycle broadly matches the German over the last 10-20 years but with obvious short-term divergences as we can witness these months. At the same time the French budget system itself is much more modern than the German, having introduced elements of performance budgeting and much broader analysis, and not surprisingly ranks much higher than the German in the Open Budget Index (I have worked on). The underlying difference between the two countries in their public finances is purely rhetorical in my perception. Budgetary outcomes (i.e. deficits over growth rates) are rather similar in the two countries but indeed we can sense a much higher openness towards deficit-spending among French politicians than their German counterparts. However, we have just witnessed at the beginning of the current Merkel government, that fiscal consolidation rhetoric is one thing and implementing it is another. This German government has started off in autumn 2009 with ridiculous tax break presents to special interest groups at times of excessive deficit projections. Now talk is cheap – but action (and favours to the populist CSU and FDP) is reality. However, what I appreciate is that a French budget minister comes to a neighbouring country to look and learn. When will a German finance minister ever visit neighbouring countries and return with some lessons?!

The second issue that strikes me is the debate over the wealth tax. It is true that the old German regime had to be abolished in 1997 due to constitutional concerns but a wealth tax per se is in no way ruled out by the German constitution (to the contrary it has own provisions) – and is in fact a serious matter of debate among all left leaning parties – but even on the right. It has become very clear that further tax sources need to be tapped in these days – but that taxing “the rich” – and getting their contribution – is not really what we currently see in Germany. When you look at OECD statistics, you will note that Germany is actually an outlier with its non-existing wealth tax while all other major economies incl the US and the UK have it. Mr Schäuble should rather discuss with his French counterpart, how and what kind of wealth tax makes most sense in Germany and take a lead in its introduction to close the budget holes he created by involving the wealthy a little more in the consolidation of public finances.

Thirdly, it is almost ironic to read that both ministers agreed to cap the EU budget. Germany and France are (among) the biggest absolute recipients of agricultural funds (CAP) (and regional funds), which account for more than 70% of the EU budget. If only the two countries encouraged national co-funding of 25% in the CAP budget or limited the overall payout in both these antiquated areas, there would be no need to talk of the vague concept of capping “the EU budget”. “The EU budget” is really farm spending in France and Germany. Be serious and take a lead towards your agriculture ministers if you mean what you say!

Finally, I would like to see more talk of tax harmonisation – or at least understanding – in Europe. The EU’s institutional problem is obviously the need for unanimity to sort out things at EU-level. However, tax harmonisation is an ideal areal for attempts of enhanced cooperation. Why do the continental Rhineland countries not start talking about harmonising their tax rules to fight tax evasion? Why can they not adapt best practices from amongst each other to align the crucial taxes on wealth, income and VAT? Their social security models are rather similar and they have similar traditions, so there should be real chances to bring at least their systems (we can talk about rates later if necessary) in line. Now this would be a real step forward – but possibly a step too far for the officials in national finance ministries.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.