TAX NEWS - 2010

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German Millionaires Volunteer to Pay More Tax

CNN and CNBC are reporting a story about a group of German millionaires who are volunteering to pay an additional 10% in income taxes for 10 years to help the German government meet its budget needs in a time of austerity.

The movement, known as the Club of the Wealthy, was formed in 2009 and now 51 German millionaires have written a letter to German Chancellor Angela Merkel proposing their idea.  It would not actually be voluntary - the idea is to have the government impose a temporary 10% charge on income.  It's unclear whether the proposal has much support among the broader circle of Germany's √©lite - there are 800,000 German millionaires, so if only 51 have signed the letter after a year's efforts, that may signal its lack of support. But the movement is gaining momentum and is underpinned by Germany's longstanding social democracy framework.

There are interesting things afoot in Germany.  After being criticized for its slow reaction to the European financial crisis, the Germans moved forcefully on financial industry regulation.  It all began with the German move to ban naked short selling, which ban has been the cause of much complaint and controversy in other countries. The Germans are also pressing for the G20 to adopt an FTT (or financial transactions tax) on banks to help pay for bailouts.  Many outside Germany could not understand why the Germans were suddenly making such a strong thrust on financial regulation - it is for the same reason as the Club for the Wealthy came out with its proposal - the German public is demanding a pound of flesh.

As this blog has also noted, there are few good policy solutions for getting western countries out of their financial crisis induced financial predicament - calls for fiscal austerity are misplaced, as contractionary fiscal policy is likely to lead to stagnant or even declining GDP, making the situation worse. While many are criticizing the German push for fiscal austerity in Europe, if fiscal austerity is going to be pushed the least worst way to do so is by raising taxes only on high income earners who can afford it.

Calls for government fiscal restraint by the bond vigilante bankers, the very people responsible for the financial crisis and who have been rescued by government bailout by socializing losses, are hypocritical as these banker miscreants suppose that fiscal restraint ought to now fall on the poorest and the middle classes via cuts in social spending. However, there is a difference between what the banker bond vigilantes wish (cuts to social programs that they could care less about) and what some rich Germans propose (sacrifice by the wealthy who most benefit from the system and the bailouts).  American "peasants" deserve what they get if they get suckered in by banker neo-liberal nonsense; they would do well to consider the German alternative.

The vast majority of households, that is the bottom 80%, can generally not afford government fiscal restraint - either through social cuts or tax increases.  The only way for western governments to get out of the fiscal predicament without plunging economies into a fiscal contraction led spiral is to go where the money really is - the wealthiest 20%.  Even Jeffrey Sachs now seems to think so.

Western countries have undergone a 30 year period during which wealth and income has become concentrated at the top quintile of society.  In the US alone, the changes in the economy and fiscal policy/taxes have led to an additional $3 trillion in income being funneled to the richest out of a $14 trillion economy. The figures are utterly shocking:  the richest 20% of households own 93% of financial wealth in America, and the richest 1% of households own 43% of all financial wealth. We are well on our way towards 21st century feudalism.

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