American progressives say they want the United States to be more like Europe, and here’s their chance: Berlin this week unveiled a series of energy tax cuts to ease the sting of rapid escalation of inflation. It’s a useful contrast to the Democrats’ current plan to raise taxes as a cure for inflation.
Alas, Berlin hasn’t seen the light on supply-side tax cuts, so the recently announced measures amount to nibbling around the edges rather than the major tax reform Germany needs. . But every gesture counts. A proposal increases the tax allowance for individuals by about 3%, making the first €10,347 ($10,900) of annual income tax-free.
Lawmakers are also accelerating the phasing out of the renewable energy tax known as EEG (we’ll spare you the German name) which currently adds 3.72 euro cents per kilowatt hour to household electricity bills (already down from 6.5 cents last year). This tax, imposed for the first time about twenty years ago, is supposed to finance subsidies for renewable electricity.
The EEG was to be phased out at the end of this year. Chancellor Olaf Scholz and Finance Minister Christian Lindner have postponed this until July 1. The abolition of the tax should allow the average household to save around €300 per year.
Berlin will also reduce consumption taxes on fuels. It increases the mileage tax deduction that drivers can claim for a journey of more than 21 kilometers (13 miles) to get to work. It increases the additional annual tax deduction for employees by 20% to €1,200. And there will be an additional €300 subsidy on energy prices through the tax system.
The government sets the total value of these and other measures at 30 billion euros. According to one estimate, they could mean €900 off the average household’s annual tax bill. All of this is a far cry from marginal supply-side rate cuts and other reforms that would permanently alter the incentives to invest and work in Germany’s often sclerotic economy. But Berlin is at least trying to soften the impact of rising energy prices without undermining incentives to work and invest.
US Democrats can learn a lesson from this, since some of them want to raise taxes despite inflation and slowing growth. The Germans have had a difficult experience with inflation for a century, and they know that the government will not help by making life and business more expensive through taxation.
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Appeared in the April 30, 2022 print edition.