German Government Unveils Plan to Help Small Business

According to a reform plan being championed by Germany’s ruling Social Democrats (SPD), lower taxes, less bureaucracy and more flexibility are the keys to breathing life into Germany’s small and medium-sized businesses, the traditional backbone of the world’s third largest economy.

The “Mittelstand Offensive”, unveiled recently by Economics and Labor Minister Wolfgang Clement and Hans Eichel, the finance minister, and discussed at the SPD’s policy-setting conclave held this week in the city of Wiesbaden, aims to boost the struggling German economy by loosening regulations on existing small and medium-sized companies and providing tax relief.

Simpler and Cheaper

The reform initiative calls for a variety of measures, including lowering tax rates for small business founders, providing support for small businesses in acquiring venture capital and equity, making regulations regarding trades and crafts more flexible, and easing the accounting requirements for small business.

“Those who start up new businesses shouldn’t be required to become experts at tax law,” wrote Finance Minister Eichel in a memo accompanying the initiative.

The exact details of the proposed tax relief are still being worked out, according to Clement, but spokespersons from the Finance Ministry have confirmed that companies with incomes up to 17,500 euro a year would be allowed to write off half of that income as an annual expense. Another alternative, which would raise the income level to 25,000 euro, would need EU approval.

Cautious Enthusiasm

The SPD plan has met with the approval of some business leaders, such as the president of the German Chambers of Commerce, Ludwig George Braun, who praised the reduction of bureaucracy and the courage to undertake serious reform. Braun spoke in front of the SPD leadership in Wiesbaden this week: His presence is seen as a slight warming in the relationship between business and the government, which had chilled considerably over the past year.

The left wing of the SPD had called for the initiative to be expanded to provide even more financial aid to small and medium-sized business. To finance increased expenditures, left-wing party members had advocated using old deutsche mark reserves from the German Central Bank which could provide an additional 50 billion euro. They had also suggested increasing taxes on the energy industry. But the government has rejected such proposals.

“We’re determined to achieve strong and steady economic growth,” said Clement, “and we don’t need to impose new taxes.” Economic growth, he said, would mean more tax revenue for the government.

Schröder’s government can ill afford to increase taxes in the current atmosphere. The Chancellor came under stinging criticism for raising some taxes after re-election in September and he and his government watched their popularity ratings plummet as a consequence.