Wealth Tax Drives Wedge Into German Coalition as Recession Looms

(Bloomberg) -- Taxing the wealthy is becoming the latest sign of how Chancellor Angela Merkel’s already-frail coalition is drifting apart, adding to the political turbulence as the economy teeters on the brink of recession.

The leadership of the Social Democrats, Merkel’s junior coalition partner, on Monday backed a proposal in principle that would aim to impose a 1% tax on wealth, a revenue stream that could be worth around $10 billion annually. Finance Minister Olaf Scholz, who comes from the party, last week expressed support for the idea.

“Approximately 45 families in Germany own as much wealth as 50% of the citizens,” Thorsten Schaefer-Guembel, an interim SPD leader and one of the main proponents of the proposal, said Monday on state broadcaster ZDF.

By comparison U.S. Senator Elizabeth Warren proposes a tax of 2% on assets above $50 million. There, Federal Reserve officials recently warned that rising inequality threatens the U.S.’s long-term economic strength.

Taxing the rich is the latest sign of how the SPD is seeking to veer the government to the left as it struggles to revert dismal polling numbers ahead of three regional elections this fall. From rent caps in Berlin to proposals for a minimum pension, the party’s push for more social welfare risks straining the coalition to the point of bursting.

Merkel’s Christian Democratic-led bloc was quick to shoot down the idea of a wealth tax, arguing that tax payers ought to be given a break at a time of an economic slowdown.

“Burdening the economy further with a wealth tax now is insane,” Sebastian Brehm, CDU legislator in Germany’s lower house, said on Twitter.

"A wealth tax is utterly out of the question," added Bavarian Premier Markus Soeder of the CSU, the CDU’s sister party. "It would be the wrong instrument at the wrong time," said following a meeting of leaders in Dresden on Monday morning.

Still, Scholz’s support and the need for Merkel to keep her coalition intact could mean the idea is more than an electoral bargaining chip. Scholz already scored a victory last week when the cabinet slashed the so-called solidarity tax, which helped finance reunification, for all but the rich. Merkel’s CDU had demanded the levy be eliminated across the board. Her government is also mulling whether to abandon its long-standing zero-deficit budget policy, which the SPD and business leaders have spearheaded.

According to a Civey opinion survey published in Welt on Monday, 58% of those polled say they favor the proposal, compared with 33% who view it critically.

‘Thrills’ Ahead

The SPD is expected to decide on the wealth tax and other issues at a party conference in December, the same time it will choose a new leadership duo and decide whether to abandon the coalition. That could lead to a minority government or a snap election.

Scholz, who is running for a role in Social Democratic leadership, expressed his support for a wealth tax as part of a political debate of possible measures in the next legislative period, finance ministry spokeswoman Nadine Kalwey said.

“It’ll be a thrilling fall,” SPD co-leader Manuela Schwesig told ARD TV on Sunday when asked whether differences within the coalition had become insurmountable. “It’s about social justice, and if the CDU hasn’t understood that, it has real problem.”

--With assistance from Birgit Jennen and Brian Parkin.

To contact the reporter on this story: Raymond Colitt in Berlin at rcolitt@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Chris Reiter

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