German ministers clash on tax week before election

German Finance Minister Peer Steinbrueck and Economy Minister Karl-Theodor zu Guttenberg clashed over conservative tax-cut plans and growth rates in a spirited TV debate on Sunday a week before the federal election.

Guttenberg, a leader in Chancellor Angela Merkel's conservatives, criticised Steinbrueck, a Social Democratic leader, for refusing to cut the so-called "cold progression" where workers' income tax brackets rise with pay increases.

He also said Steinbrueck was underestimating the positive impact of growth on revenue when it comes to lowering income tax rates. He attacked Steinbrueck in the ARD programme for SPD plans to raise taxes on high-wage earners.

"There will be a brighter economic situation in 2010 and there will be scope to tackle the cold progression," Guttenberg said. "We can take a first step in 2010 and then there should be scope for more in 2010.

"What I never hear from you is the word 'growth,'" Guttenberg said of Steinbrueck. "You can't underestimate the impact of growth could have on cutting tax burdens."

Steinbrueck dismissed Guttenberg's calculation, saying it would take 25 billion euros of extra revenue to be able to eliminate the cold progression.

"We'd need 9 percent growth for that," Steinbrueck said, adding: "Where do you quote me saying I'm against growth? I'd only warn against believing that we can resolve all our problems with growth."

Cold progression is a multi billion-euro source of tax revenue for Germany, which does not adjust tax brackets for inflation. Thresholds in the progressive tax system are not automatically adjusted. The "bracket creep" means the state will take in an extra 22 billion euros in 2010.

The finance minister also rejected Guttenberg's criticism of SPD plans to slightly raise taxes on high-wage earners, saying it would affect only a very small percentage of people. 

"Everyone in this audience who earns more than 250,000 euros per year please stand up" Steinbrueck said, turning to the audience of about 50 people. "None? What's the problem then?"

Steinbrueck and Guttenberg warned the next government faces a difficult fiscal situation -- no matter which parties govern.

"We're headed for a difficult situation as far as revenue and expenditures are concerned," Steinbrueck said.

Guttenberg said: "We're facing years where we'll have to cut costs and take a more critical look at some sacred cows."