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WSJ: Opinion Journal

Editorial Page

November 20, 2002

It's the Economy, Schroeder

In Berlin and Washington, we are now being offered a rare political spectacle -- near-perfect reverse images of how to respond to an economic slowdown. In the U.S., the talk is all about tax cuts, while Chancellor Gerhard Schroeder announced Monday that his government plans to raise taxes in response to stagnant economic growth in Germany.

In particular, the newly re-elected Mr. Schroeder is going after one of the few havens of relative tax-freedom in tax-heavy Germany -- long-term capital gains. Monday's proposal would tax, at a 7.5% effective rate starting in February, the gains from sales of securities held for more than a year and property held more than 10 years.

No one in Germany thinks this will stimulate the economy. But the government says it needs the money, so it's taking it any way it can. Apparently the idea that it's precisely in tough economic times that Germany's citizens can least afford new taxes was not much of a consideration.

Slowing economic growth, the war on terrorism and other factors have converted America's federal budget surplus into a deficit. Like Mr. Schroeder's Social Democrats, the Democratic Party in America proposed to meet the shortfall through tax hikes. But while Mr. Schroeder barely won re-election in September, his popularity has plummeted since his tax increase proposals. The Democrats were less lucky. Having made their tax intentions known before this month's elections, they lost the Senate and ceded the Republicans a larger majority in the House of Representatives. As a result, President George Bush's Republican Party, unlike Mr. Schroeder's Social Democrats, is riding high.

In the U.S., the Republicans are focused on how improve economic growth to make it easier for people to pay their bills. Germany's governing coalition has it backwards, wanting to raid the pocket books of voters so that the government doesn't have to economize.

Germany, in short, is stuck with what might be called a "treasury view," which puts the government's interest in supporting its budget above all else. After eastern Germany was devastated by flooding this summer, the chancellor's reaction was a tax hike -- to aid in the recovery, of course. Now he's proposed more of the same. Even if tax increases might help the government reduce its large deficit -- and that is by no means certain -- it is no cure for anything else that ails Germany. As we said after the flooding, tax hikes will be just another heavy burden on those most affected by hardships, whether they derive from natural causes or bad economic policies.

When President Bush first proposed a tax cut, the U.S. government enjoyed a surplus. That surplus has vanished but recognizing that the comfort of the government's budget-planners does not come before the needs of the citizenry, the Republicans look poised to cut again, deficit or no deficit.

We don't expect Messrs. Schroeder and Bush to sit down and compare notes on economic strategy in Prague this week, assuming that these two estranged leaders will have anything at all to say to each other. But we hope Germans and Americans alike look across the water at their counterparts and take note of what might have been had they voted differently.

The contrast, though unfortunate for Germans, is instructive. Mr. Schroeder beat a candidate, Edmund Stoiber, who ran on promises of tax cuts. The Democrats in the U.S. lost in part because of their opposition to Mr. Bush's cuts. Now it looks like both countries will get the economic policy they asked for. On the one hand, you have a government looking after itself. On the other, a president trying to look after his country's economy. It remains to be seen what the Republicans will come up with, but at least they're starting in the right place.
 

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