Tax Reform and Debt Sustainability in Germany

Abstract

In 2005, the German government announced a far-reaching fiscal adjustment program. This paper uses the IMF’s Global Fiscal Model to study its impact and explores options for addressing long-term pressures from population aging. The growth effects of the planned VAT increase are likely modest, largely owing to the stimulating effect of other tax reductions. The reform will improve the long-term debt path but achieving fiscal sustainability requires further adjustment over the medium term. An additional package of expenditure restraint, entitlement reform, and tax-base broadening compares favorably to other adjustment options. Spillover effects to trading partners of these policies are modest.Aging;Debt sustainability;Tax reforms;Value added tax;Economic models;taxation, tax reform, fiscal adjustment, tax base, fiscal policy, payroll taxes, vat rate, tax measures, government spending, corporate income taxation, fiscal model, fiscal sustainability, tax policy, consumption tax, tax increases, tax system, fiscal consolidation, tax rates, corporate income tax, expenditure cuts, fiscal pressures, direct taxation, indirect taxes, tax reform proposals, indirect tax, income taxes, tax reductions, public debt, tax exemptions, aggregate demand, personal income tax, efficient tax system, indirect taxation, fiscal policies, vat revenue, consumption taxes, budget constraint, fiscal deficits, fiscal adjustment package, fiscal deficit, direct taxes, income tax rates, effects of taxation, fiscal reaction function, personal income taxes, sales tax, expenditure ratios, tax distortions, expenditure restraint, cuts in government spending, fiscal reform, fiscal affairs department, tax bases, fiscal reaction, fiscal difficulties, payroll tax, fiscal implications, fiscal impulse, expenditure policy, direct tax, tax burden, fiscal affairs, fiscal structure, fiscal balance, fiscal issues, fiscal improvement, fiscal scenario, marginal tax rates, deficit reduction, capital stock, fiscal variables, primary expenditure, fiscal developments, current account deficit