CDU rejects tax harmonisation

Germany's contender for finance minister has spoken out against EU tax harmonisation and in favour of corporate tax competition between member states.

With less than two weeks to election day, no theme has dominated the campaign more than the sweeping finance plans of Paul Kirchhof, a university professor, tax expert and former constitutional court judge.

Prof Kirchhof was enrolled as finance expert in the election team of Dr Angela Merkel, the Christian Democrat (CDU) leader, and caused a minor revolution by calling for a new flat income tax of 25 per cent.

Yesterday he turned his outspoken manner to European finance and turned Berlin policy on its head.

"I would never support guidelines against so-called tax dumping. Every country has autonomy in the sense of its own legislation and every country should strive to be better than the others," said Mr Kirchhof, in an interview yesterday with foreign correspondents in Berlin.

His remarks are in stark contrast to current finance minister Hans Eichel, who has never hidden his annoyance at countries with lower corporate tax, such as Ireland.

"If some other countries have lower tax rates than us that's no damage to us because every company knows what infrastructure it gets for its tax rate," said Prof Kirchhof, adding that comparing Germany to low-tax central European economies was like comparing a compact car with a luxury model.

"If you want luxury you buy the €60,000 car. We have good infrastructure, good employees a stable currency and a large number of patents," he said.

Prof Kirchhof added that a CDU government would favour tax-setting competences remaining in the hands of the member states and not with the EU.

The remarks of the 62-year-old professor of finance at the University of Heidelberg will enliven further the economic debate in the election campaign.

The political novice arrived with a bang last month with his promise to simplify the German tax system. A 25 per cent income flat tax was possible, he said, financed by abolishing over 400 tax breaks and privileges.

"We have to rediscover and correct finance and tax policies which have become completely rudderless," he said. "We don't want to fix here and there, give here and take there, but a complete fundamental structural renewal."

The first stage of the renewal, as forseen in the CDU election manifesto, would see the income tax rates falling to 39 and 12 per cent, a corporate tax cut to 22 per cent and a 2 point cut in social welfare contributions to 4.5 per cent. Budget shortfalls would be met by raising VAT by 2 points to 18 per cent.

The Social Democrat chancellor, Gerhard Schröder has criticised the policy saying "it is socially unjust that the manager pays the same level of tax as his cleaning lady".

CDU state premiers have also openly opposed the plan, fearing a huge drop in their take from tax income.

But Prof Kirchhof shrugs off the "socially unjust" criticisms.

"Justice begins when tax evaders' income is taxed fully. People earn €100,000 yet reduce their taxable income to zero with completely legal tricks. Zero tax on a high income is the unjust tax," he said.

Dr Merkel has said Prof Kirchhof's tax plans are aspirational but that the priority in any first term would be the tax cuts in the election manifesto.