One rate fits all for EU tax

There’s more at stake in this weekend’s election in Germany than politics. Tax has become the key battleground as finance minister-in-waiting Dr Paul Kirchhof promises to make Germany the first major country in Western Europe to introduce a 25% flat rate of tax.

The flat tax wind has been sweeping across the EU from its eastern European neighbours for some time, with smaller states already quietly considering the issue. But Kirchhof threatens to put it centre stage, using Germany’s political muscle to force other states to think again on their tax systems.

Appointed just last month, Kirchhof’s impact has already been felt on UK shores, with Conservative shadow chancellor George Osborne announcing a ‘high-level’ commission to examine the benefits of a flat tax system. The Treasury has already dismissed any changes outright.

But it won’t be all plain sailing for the Heidelberg Professor. His party, the centre-right Christian Democrats, will first have to convince the electorate and unseat the long-standing chancellor Gerhard Shröder on 18 September. Kirchhof also has to win round colleagues in his own party and there are doubts as to how far Angela Merkel, the CDU’s chancellor-in-waiting, would be prepared to go if she wins office.

The 62-year-old former judge has long been a critic of Germany’s tax laws. He proposes a radical reform of the country’s 90,000 tax rules and 418 exemptions with each citizen paying just 25 cents out of each euro earned in tax. Under this system, income over a basic allowance is taxed at the same rate, rather than an increasing scale, while complex reliefs and exemptions are abolished and corporate and income rates become the same.

Kirchhof has already appealed to Germany’s voters claiming that his system would abolish the current 4,000-page ‘red bible’ used to navigate around its complex tax laws and fill in tax returns. He promises that a flat tax rate would ensure a speedier process, rather than the ‘12 Saturdays’ it currently takes to complete German tax returns.

More significantly, Kirchhof also argues that flat rates of tax have already kick-started economies in Eastern Europe, with the Ukraine operating a 13% tax rate and Romania 16% and could provide a similar boost to Germany’s beleaguered economy.

He claims that he could begin implementing his reforms by 2007, and Merkel, desperate to come up with a solution to tackle the country’s five million unemployment rate, has given Kirchhof her support – for now.

But the tax expert is known to be uncompromising. He is a Eurosceptic and, as a former constitutional court judge, drafted the 1993 ruling on the Maastricht Treaty, which gave Germany a right to strike out any EU law that breached its constitution.

He has also ruled out serving in a coalition government, or any attempt to water down his hardline tax views, while many in the party believe that Merkel will shy away from full implementation.

But whether Kirchhof attains a senior government position or not, he remains one of Europe’s most outspoken tax experts and with countries such as Greece already examining a 25% rate, he may see his reforms slowly take root across the EU.