BONN SHOULD SPEED UP TAX REFORM, INSTITUTE SAYS
West Germany's proposed tax reform should
be brought forward to stimulate economic growth and head off
U.S.-led pressure on Bonn to take further fiscal steps to help
boost the world economy, the Ifo economic institute said.
    An Ifo report said, "The total growth effect of the reform
could be considerably enhanced, and international pressure on
the government therefore reduced, if a larger portion of the
tax cuts planned by 1990 were brought forward to 1988."
    Swift action is required to remove growing doubts about how
the 44 billion mark tax reform will be financed, Ifo said.
    The report says the tax reform will be insufficient and too
late to stimulate economic growth, as demanded by West
Germany's industrial partners.
    Since the lion's share of cuts worth a gross 44 billion
marks "will not go into effect before 1990, their impact on
growth will be too little, too late," said Ifo.
    The West German government has consistently said that by
cutting taxes and encouraging consumer spending it is boosting
domestic demand and making a significant contribution to world
economic growth.
    Bonn has agreed to increase the scope of tax reductions
planned for 1988. In March, the government said 1988 tax cuts
would be expanded by 5.2 billion marks to 13.7 billion.
    A month later, economics minister Martin Bangemann
countered a joint call from all five German economic institutes
to speed up tax cuts by saying such a step would endanger
efforts to consolidate the budget and keep new public borrowing
down.
    Financing the tax reform has become an "acute problem," Ifo
said.
    "Currently, every proposal over financing (the reform) comes
up against political opposition. There will be a lot more
criticism before the outstanding 19.4 billion marks needed to
finance the reform has been accounted for," the report said.
    The government has pledged to agree by the Autumn how to
raise around 19 billion marks still needed to finance tax cuts.
Subsidies paid to ailing industries are the major target.
    But even leading coalition members like Matthias Wissmann,
economics spokesman for the ruling Christian Democratic party,
have conceded that subsidy cuts exceeding five billion marks
are unrealistic, leaving a remaining 14 billion marks to be
found.
    An increase in public borrowing will be inevitable to help
finance the tax cuts, but Bonn should be able to cope with
this, the report said.
    Despite vigorous opposition from the Free Democrats, the
junior partners in the centre-right coalition government, Bonn
will eventually be forced to increase value added tax (VAT) due
to tax harmonisation measures within the European Community. A
VAT increase will also provide funds for income tax reform, the
report said.
    Viewed in the context of efforts by Bonn, Washington and
Tokyo to reform taxes, "despite its various shortcomings, West
Germany's planned tax reform is better than its reputation," Ifo
said.
    The effective cut in the income tax burden carried by West
Germans will be greater than in the U.S., Although the rate
reductions are smaller and income tax levels will remain higher
overall, the report said.
 REUTER
