Germany's solution to economic woes

Montgomery Burns · November 16, 2005

Germany in the past three years has been the world’s most depressed economy, with the weakest growth in economic activity and consumption...Jim O’Neill, the chief international economist of Goldman Sachs, remarked on television last week that German politicians are acting as if they had never seen an economics textbook, much less understood one.
Accordingly, the new German Government has decided to impose one of the biggest tax increases in postwar history and to target the extra taxes on the weakest and most sensitive parts of the economy: consumption, which will suffer a three percentage point increase in VAT, and housing, which will lose tax incentives for first-time buyers. In addition, to fend off accusations that the new consumption taxes will bear unfairly on poorer consumers, the Government will hit the rich as well, increasing the top rate of income tax from 42 per cent to 45 per cent.

It seems that Angela Merkel’s idea of a compromise between the Christian Democrats, whose most unpopular idea was the VAT increase, and the Social Democrats, who were berated for demanding higher income tax, was to combine the most unpopular measures from both parties’ manifestos, while dropping all the rest.

The top rate is 45% (and kicks in at about $110,000 CDN, Canada's kicks in at $155,739). Add on Canada's provincial rates and most high-income Canadians would be paying about 60% on the top rate.

And 3 points added to the Value Added Tax--that's huge. And then there is this:

Speaking to one of Germany’s most prominent economists a few days ago, I noted a decline of consumer spending in response to higher taxes is not just a theoretical possibility but a well-established empirical reality — demonstrated by widespread evidence from a large number of countries.
“Maybe,” he replied, “but the Germans are different. When taxes are raised in Germany, I can guarantee that consumers will become more confident and will spend more. You see, we Germans are today more worried about the deficits of our Government than about the incomes we receive.”

1) Have the Germans gone "soft"? Is that why they turn over so much of their income for vast generous social welfare programs, which are implemented by a vast inefficient bureaucracy?

2) Should Canada - economic wise - lean towards the socialist policies of Germany/Western Europe or lean towards the capitalism style of the USA?

Btw, Angela Merkel turned out to be a big disappointment. If she is what passes for "rightwing" in Europe, then I fear for Europe's future. Europe needs another Margaret Thatcher.