Tax Relief for Small Business

Germany's red-green coalition government has announced tax relief for small business. The federal Economy and Labour Minister Wolfgang Clement said on Monday he planned to introduce a blueprint for reform after Christmas.

The plan would take the pressure off business by cutting back on bureaucracy and allowing companies to accumulate greater equity capital.

The announcement comes after the parliament last week approved the first of the controversial changes proposed by the government's commission on labour market reform, referred to as the Hartz Commission after its chair, Peter Hartz.

A spoonful of sugar...

The plans to reduce the burden on small business have been widely welcomed, though the government has been criticised for backtracking on its approach to tax reform. The moves are part of the coalition's new offensive intended to diffuse opposition to economic reforms from Germany's small business sector, considered the backbone of the country's economy .

But the Liberal Democratic Party's financial advisor Rainer Brüderle says the government's 'mini-tax' concept is simply a sweetener to try to disguise the bitter pill of its real reform proposals.

Less paperwork, more jobs

The government says it wants to extend new rules that apply to self-employed individuals to all small enterprises. Under the scheme, individuals earning up to €25,000 a year who register as self-employed are to be taxed at a flat rate of ten percent, compared with a previous rate of nearly 20%.

The proposals announced this week mean that up to a certain level of turnover, small business income will also be taxed at a lower rate. In addition, companies will be allowed to make lump sum payments to the finance department, significantly reducing the burden of paperwork.

The moves suggest confidence in the government's reform plans has increased slightly. The controversial proposals, which include the creation of low-paid part-time 'mini-jobs' and more temporary jobs, have put the German Chancellor Gerhard Schröder under extreme pressure.

But the government's mood on Monday was up-beat, with the Labour Minister declaring that the increased employment opportunities flowing from the reforms would provide an important boost to the country's labour market, and predicted that unemployment figures would drop back below four million in 2003.

Strategy paper

A strategy paper outlining radical social reforms drafted last week by the Chancellor's office has divided opinion within the government as well as among the opposition.

Some on the left of the ruling Social Democrats have described the paper as an attack on workers and on the weak in society. That view found support with some in the opposition including the CDU's leader, Angela Merkel, who has warned against introducing too drastic reforms.

The changes outlined in the government's paper would mean that pensioners, the unemployed and others on social benefits would see their payments significantly cut.

But the process still has a long way to go. With elections in two states in February, the federal government will be eager to prevent further damage to its image. That could mean offerering more concessions and sweeteners in the coming weeks.