Germany increases VAT by 3% to 19% 2007

The German tax authorities have announced plans to raise Value Added Tax from 16% to 19% on 1 January 2007.

The VAT increase is being used to fund the following measures:

• Cut in employer taxes
• Help reduce the government deficit to below 3% of GDP, a key requirement of the Euro currency membership

The German VAT strategy, of shifting taxes away from job-creation (i.e. the employer taxes) onto consumption through VAT has long been advocated by economists looking to eliminate distortions in markets.  This move puts German VAT slightly ahead of the EU average VAT rate of 18.5%.  It is likely therefore that other countries will follow suit to ensure they remain competitive with German costs of production.