Bruce Bartlett Opinion Editorial: Britain and Germany are Cutting Taxes

Opinion Editorial
Wednesday, March 17, 1999
Britain and Germany are Cutting Taxes

It is ironic that as congressional Republicans back away from reducing tax rates for fear of being portrayed as unfair, the leftist Labor Party government in Britain has just put forward a significant tax rate reduction in the name of fairness. And in Germany, leftist Chancellor Gerhard Schroeder sacked his finance minister last week after German companies threatened to revolt over plans to raise their taxes. Schroeder now promises to cut taxes on business, rather than raise them.
The British tax plan was put forward by Chancellor of the Exchequer Gordon Brown in a message to Parliament last week. Among the measures announced:

The corporate tax rate will be reduced from 31 percent to 30 percent. It was 33 percent when Labor took power two years ago. (The corporate tax rate in the U.S. is 35 percent.) A 10 percent tax rate will apply to the first $16,300 of profit. (A 15 percent rate applies here.) Small businesses will also be allowed a 40 percent deduction on all of their new investment. (In the U.S., such investments typically must be written off over many years.)

A new bottom tax rate of 10 percent will be introduced for low income workers, a sharp cut from the 23 percent rate they now pay. (The lowest tax rate in the U.S. is 15 percent.) The basic tax rate that most taxpayers pay will also be cut from 23 percent to 22 percent.

The tax rate on long-term capital gains will be just 10 percent, with the first $11,500 of gains by individuals completely exempted from tax. (The U.S. capital gains tax is 20 percent on all gains, except those on owner-occupied homes.)

The threshold for paying the estate tax will be raised by $13,000 and the top tax rate will be 40 percent. (The top estate tax rate in the U.S. is 55 percent.)

Overall, taxes will be cut by more than $6 billion or about 1 percent of Britain's gross domestic product. A similar sized tax cut here would be about $90 billion.

In his budget message, Brown explained that governments of the Left "have too long undervalued enterprise and wealth creation," and that the "tax system has undervalued entrepreneurship and investment." He pledged to reward Britain's risk-takers and innovators, in sharp contrast to the socialist policies of previous Labor governments that were actively hostile to business and wealth creation.
In Germany, Finance Minister Oskar Lafontaine initially planned to go in a different direction, with a proposal to raise business taxes there. But German business united to attack the effort, pointing out that they already pay the highest corporate tax rates of any major country. (The rate can go as high as 58 percent.) Major corporations like Allianz, a big insurance company, and RWE, an energy and industrial group, threatened to leave the country if Lafontaine's tax plans were implemented, leading Schroeder to fire him when he refused to back down.
Such behavior is highly unusual in Germany, where big companies seldom ever speak out against government policies. But the pressure to succeed in an increasingly competitive world market has made many German companies do things they previous would not have done, such as investing heavily outside Germany. Last year German companies invested almost $100 billion in foreign companies, led by Daimler-Benz's $38 billion takeover of Chrysler. Such deals were necessitated because the tax and regulatory environment in Germany is no longer hospitable to investment, contributing to its 10.5 percent unemployment rate.
If American companies were as outspoken on taxes as those in Germany, perhaps a Republican Congress would find the wherewithal to pass a tax cut as bold as that of Britain's leftist government.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 17, 1999.

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